Sole trader vs limited company

When you’re setting up your new business choosing the structure for your company set up can be hard to fathom.

We’re often asked what the differences are between setting up as a sole trader, also known as being self-employed, and forming a limited company. Here we take a look at both types of business and compare some of their advantages and disadvantages.

What is a sole trader?

A sole trader isn’t necessarily someone who works alone, you can still take on employees. As a sole trader though, you have sole responsibility for your business and your company is not distinct from yourself.

Working as a sole trader you can keep all of your profits after tax, but you are also liable for your business debts, which can put your personal finances and assets at risk.

As a sole trader you will need to register with HMRC and complete an annual Self Assessment tax return. It is well worth keeping your business and personal financial affairs separate, helping you to distinguish between the two for this return.

What is a limited company?

A limited company allows you to set up your business as a separate and distinct entity, and as such, your personal liability is protected should your business go into debt or have a claim made against it.

While you do have less control over the profits of your business, after Corporation Tax has been paid, these can be shared as dividend payments. This is especially useful as it means that you can take a relatively low salary, attracting only the basic rates of PAYE and National Insurance, topping up with dividend payments at the end of each year.

As a director of a limited company you’ll also be able to claim back expenses for items such as clothing and equipment, as well as travel and subsistence expenses, rather than paying for them yourself.

There are several different types of limited company including:

  • Private company limited by shares.

  • Private company limited by guarantee.

  • Public limited company.

Pros and cons – sole trader vs limited company


Sole trader

Limited company

Is your personal financial liability protected?


Is your business name protected?


Is it quick and easy?


Is it free?


Do you need to complete a Self Assessment tax return?


Do you need to complete Companies House returns?


Can you sell your business on?


Is it tax efficient?


Do you need to keep company accounts?


Your limited company – it’s all in the set up

While there is a cost involved in setting up your limited company this can be negligible. In fact, if you use a formation agent it can even cost less than your Companies House registration, while still including it.

With our company formation packages your company incorporation can take as little as three hours to complete and our online form can take 20 minutes to fill in. The information you’ll need to pass to us on the form includes your new company name and address, your directors’ and secretary’s details, plus the share capital and shareholders’ details. And while it’s an online process you’re not alone while you’re doing it either. Our support team can be on hand to help during office hours, either by phone, email or via online live chat to make your company formation as straightforward for you as possible.


Advice from the company formations experts

If you're thinking of forming a limited company, you can access all the advice you need - from legal obligations and taxation to HR and marketing - over on our help centre. We've also got some handy company formation guides to handle some of smaller details for you.