Limited Company or Sole Trader – what’s best for you?

There are somewhere north of 6 million small businesses in operation in the UK with more and more people making that leap every day.  There are many challenges you will face when starting out on your own, regardless of the type of business you want to create.  Be it around how to market your company, do you need a website, who will create it for you, what insurances or qualifications do you need, how do you price your product or service, the list is endless.

A question I get asked a lot is, should I be a limited company?   The answer I usually give everyone in the first instance is, it depends!

I don’t really think there’s a lot of help out there for you guys who’ve started out and haven’t yet had a chat with an accountant, it can be all very confusing so, hopefully this might help some of you get off on your best foot.

What is a Sole Trader

A sole trader is someone who is running a business that is not incorporated.  This is often how most businesses start out and means that you will have to register with HMRC for self assessment as you will be self employed.

You can register for VAT as a sole trader and you can employ people as a sole trader, you just need to register for these things with HMRC and then make sure you submit all necessary returns on time.

There seems to be a common misconception floating around that it’s better to be a limited company in order to employ people, this is not the case, an employer is an employer and they have the same requirements regardless of whether there is a Limited after your business name.

From an accountants’ perspective the administrative burden on a sole trader is fairly low.  Yes, they have to keep books and records of their income and expenses just like everyone else BUT they only have to submit one self assessment tax return (and pay any tax due!), and they don’t have to file anything with Companies House, so no statutory accounts each year.

What are the downsides to this, I hear you cry, why isn’t everyone a sole trader?!

Well, with a sole trader the business and the person are seen as one legal entity.  This basically means that were the business to get in to debt or start struggling financially, then the sole trader would be liable for those debts and her or his personal assets would be potentially up for grabs as well.  There are other, less dramatic downsides, such as sometimes it can be difficult for non-incorporated businesses to raise finance for expansion or development and generally if you are approved, the amount of finance is often lower than for a limited company.


-          Less regulation

-          Easier and faster to set up

-          Usually lower accountancy fees


-          No limit on liability, you and the business are one in the same

-          Raising finance can be tricky

-          Could end up paying more tax

Limited Companies – worth the hassle?

Building on the above, there are still plenty of reasons to incorporate your fledgling business, even if you don’t use it straight away.   If you love your company name and don’t want anyone else to use it, you can register with Companies House for £12, if an incorporation service or an accountant does this for you then it’ll probably cost a bit more.  Although you’ve registered it, you don’t actually have to trade out of it if you don’t want to and can continue on as a sole trader for now.  All you need to do is make sure the company is dormant, submit dormant accounts each year and submit a confirmation statement annually which will cost you £13.

This sounds scary, but there is plenty of online help on Companies House for you to do this yourself, or you can ask your accountant to do it for you.

If you are trading out of your limited company then you need to bear in mind that you need to make sure you keep books and records as you would with a sole trader, you need to submit statutory annual accounts for the company each year, you will need to complete the confirmation statement each year and you will need to complete a company tax return each year.  As a Director in a company you will also need to submit a self assessment tax return each year.

You’ll more likely than not incur a higher level of accountancy fees with a limited company, however your accountant should also be providing advice on the most efficient way of extracting an income from your company which is where the value really lies.


-          The company is a separate legal entity so personal liability is limited

-          Potentially better access to finance and funding

-          Preserve a trading / company name

-          Potentially more tax efficient


-          Increased administration and regulation

-          Higher professional fees

Everyone’s circumstances are different, so it stands to reason that one solution doesn’t fit all. I hope this has helped clear up some of the confusion around the two options and helped you make a more informed decision.  You can always contact us directly if you’ve got any questions, we’re happy to help!