Sole trader or limited company?

Maybe you have been trading as a sole trader for a while, or maybe you have just got your new business idea down. Either way, you are wondering about how being a sole trader compares to trading as a limited company. Here are some of the things you should be thinking about….

Personal risk

This is a biggie. As a sole trader you are the business and are personally responsible for its debts. In contrast, if you trade as a limited company, you enjoy the protection of the veil of incorporation, and generally your personal risk will be limited to any amounts you have invested in the company and any personal guarantees you have provided.

Set-up / ongoing administrative costs

The administrative burden of being a sole trader is usually accepted as being a little lower than that of trading as a limited company. You can get going pretty much straight away and there is no need to file publicly available annual accounts and returns with Companies House as is the case for a limited company.


Imagine you had to choose between two suppliers and the only difference between them that you can see is that one a sole trader and the other is a VAT registered limited company. Which would you choose? Perception counts, and rightly or wrongly most of your customers will instinctively associate a limited company with a stronger, more established business.

Reward and remuneration

Having worked hard in your business, you want to enjoy the fruits of your labour and the profits your business has generated…

As a sole trader you are considered by HMRC to be self-employed and are liable to pay income tax on any and all profit made your businesses. You are also potentially liable to pay Class 2 and Class 4 NICs depending on the profit you achieve.

In contrast, as the owner/manager of a limited company you are both an employee of the company and a shareholder in the company. Monies paid to you as an employee are subject to PAYE and NI and any dividends you receive will be liable to income tax.

So in which situation are you better off?

This is one area where professional advice should  be sought, as despite recent moves by the government to homogenise the taxation of sole traders, owner managers and employees – all to the benefit of the government of course – the answer for you will very much depend on your own particular situation.

Sharing the rewards

Excuse the pun. Ordinary shares are one of the defining features of a limited company and make it easier to share the ownership of a business. They  can also be used to help incentivise staff through vehicles such as minority stakes and share option schemes equivalents of which are not so easily accessed by sole traders


So, there you have it some of the many things to think about when comparing being a sole trader to being a limited company. If you are thinking of trading as limited company remember that WCL’s business law service can help you set up your company, draft critical shareholder agreements and more. Give us a call on 01225 585 756 or email Sarah at  [email protected] we’d love to help.