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Limited company vs sole trader: what’s best for my business? 

There’s so much to think about when starting a business that your time and headspace is at a premium.

One of the first decisions to make is whether to operate your business as a sole trader or as a limited company. If you do nothing and get straight to work, then you will be a sole trader and you’ll typically refer to yourself as self employed. That can seem quite appealing amongst everything else you have to do.

However, considering the benefits of setting up a limited company versus operating as a sole trader at the outset is always time well spent and will save you time and money in the future, give you comfort in terms of risk and set you up for growth going forward.

What does it mean to be a sole trader?

If you start a business on your own without any other formality then you are a sole trader. 

This means that you, the self-employed business owner, and the business are one legal entity. The assets of the business are your assets and the debts of the business are your debts. If something goes wrong, then you, as business owner, are responsible. If that something involves payment of a debt or someone bringing a claim against the business then your personal assets, such as your savings, your house or your car are on the line to settle those debts and/or claims.  

Why would I set up as a sole trader?

At first glance, setting up as a sole trader feels simple. 

  • It does not need any additional paperwork initially or annually;
  • Business details, including your income, are kept private;
  • The business is absolutely yours to control;
  • If the business makes a profit, then so do you.  That is your income. 
  • In terms of taxation, there is no separate corporation tax to understand, just income tax.
  • If you are the only person in the business, then you do not have to set yourself up as an employee and your business as an employer.

What are the common misconceptions about the benefits of operating as a sole trader? 

There are several areas where there is a belief that it is easier to operate as a sole trader rather than as a limited company, when there is actually no difference between the two. With these as context, the additional paperwork of administering a limited company is actually very small.

Contracts with Customers/ Terms and ConditionsWhether you operate as a sole trader or a limited company, you’ll need to set out the terms and conditions on which you do business so as to avoid misunderstandings and disputes between you and your customers.
Value Added Tax (VAT)Once you pass the VAT threshold, whether you are a sole trader or a limited company, you will have to charge VAT on relevant goods and/or services and file the necessary paperwork and account for that VAT to the relevant tax authorities.
Receipts and InvoicesWhilst there is no separate corporation tax due when you are a sole trader, you still have to document and retain all your receipts and invoices in order to complete your self-assessment tax return.
EmployeesWhether you operate as a sole trader or limited company, if you take on employees, you will have to document that employment relationship by contract and comply with all legal obligations relevant to employers. 
 InsuranceWhether you operate as a sole trader or limited company, you will need to put insurance in place, whether that is professional indemnity insurance, employers liability insurance, public liability insurance or other to cover the specific risks associated with your business.
Licences and/or PermitsWhether you operate as a sole trader or limited company, you will have to apply for and acquire any licences or permits required for you to carry on your particular business, for example in relation to hygiene or safety.

What are the major risks of operating as a sole trader?

There are two major risks to operating as a sole trader:

Risk to Your Personal AssetsAs there is no legal distinction between you and your business, then in the event of a claim against the business and there being insufficient funds in the business to settle that claim, then you will have to settle it from your personal assets, without limit as to amount.
Risk to Business GrowthIf your goals for your business involve seeking investment, building your workforce and general growth and expansion then operating as a sole trader puts you at a disadvantage in these areas versus a business that is set up as a limited company.  This is partly because as a sole trader ‘you’ are the business and for example any investment would become mixed with your personal assets- investors want to invest in a business that has a ‘life of its own’.

What is a limited company?

A limited company is created by a process known as ‘incorporation’, which requires certain forms to be completed and submitted to a central Registry, known as Companies House. 

You become an owner in the company through taking ‘shares’ in it. You will also likely be a director, who makes the decisions on behalf of the company.

Once incorporated, the company has its own legal existence, distinct from you as a shareholder. This means that the company:

  • pays its own tax, separate to your own personal taxation;
  • contracts in its own right, including with customers and employees;
  • can admit other ‘owners’ through those people becoming shareholders; and
  • has one or more directors who make decisions on behalf of the company.

How long does it take and cost to set up a limited company?

You can set up a limited company within a few hours and at a very small cost – tens of pounds. See our guide to  how to set up a new company.

Does setting up a limited company mean that you pay more tax?

It is generally more tax efficient to operate as a limited company rather than as a sole trader.

Whilst the company pays its own tax, corporation tax bands are often lower than income tax bands.

As a sole trader you are taxed on the profits of the business, regardless of the amount of money you actually make, need or spend.

With a company, your own personal tax is dealt with separately and therefore if you do not draw money from the company, either in terms of a salary or through dividends, then you do not pay tax personally and the company retains those profits going forward. In addition, companies generally qualify for a larger range of allowances and tax deductible expenses. It is always worth speaking to an accountant to understand what this will mean in your own personal circumstances. You may be able to structure things such as company cars and other benefits through a company with your accountants guidance.

What about your personal assets?  How does a limited company structure help?

As the limited company is a separate legal entity, then any claim against your business is brought against the company and not against you, as a shareholder, personally unless the claimant can argue some sort of fraudulent or similar activity on your part. 

Your personal liability is limited by the amount of your investment in shares in the company and/or the amount that you have agreed to pay for your shares (which could be as little as say £1).  Beyond that and so long as all of your actions in respect of the company (as shareholder or director) are legal and ‘above board’, you have no responsibility for the liabilities incurred by the company and your personal assets are safe.

How a limited company helps you in attracting customers and suppliers

Customers and suppliers often attach greater credibility to a limited company.  In fact, some companies may have a policy of only contracting with limited companies. Reasons for this include:

  • the transparency of the information available at Companies House, including trading history and accounts and details of shareholders and directors; and
  • a sense of permanence in that a limited company will continue to exist even if one of the shareholders leaves for any reason or dies.

How a limited company helps you in attracting investment

For similar reasons, limited companies find it easier to attract loans, investment and business partners.

Investors and new business partners can invest or provide funding by taking shares in the company and becoming shareholders themselves, secure in the knowledge that their liability is limited to that investment amount.  This is not an option open to a sole trader and therefore severely limits funding and investment available going forward.

How a limited company helps you to attract employees

To attract, motivate and retain the talent needed to grow your business, you will have to offer an attractive employee remuneration package.

A limited company structure allows you to offer share ownership and/or share options as part of this package, which means that, financially, employees share in the success of the business – now and/or in the future. As a sole trader, you are unable to offer your employees an equivalent to share ownership.

How a limited company helps when you come to sell your business

If your ultimate aim is to grow and then sell your business then a limited company structure is the easiest route to allow you to do this.  In simple terms, when the time is right, you just sell your shares in the company.

As the company is a separate legal entity, then this sale typically does not disturb any of the company’s business contracts, whether with customers, suppliers and/or employees and also any of its liabilities, which stay with the company.   It is very much business as usual.

In contrast, being a sole trader creates problems when you attempt to sell your business, as all the contracts will be in your name, such as business premises, customers and employees. These will have to be transferred individually to the new buyer. Often this is not possible without the consent of the other party to the contract. If there are any liabilities associated with these contracts, then these will typically not pass with the ownership of the assets.

If you wish to simply sell your assets, then this may also not be possible as it strays into a complicated area of law as to whether the assets amount to a business being transferred as a going concern which has implications for both tax and for employees, who will automatically transfer to the buyer, whether that buyer wants those employees or not.

A limited company structure can be a very effective way to set up your company for future growth and investment, whilst limiting your liability and personal risk. If you would like to explore setting up a limited company further or any of the topics covered in this article please consult our corporate solicitors. Get in touch on 0800 689 1700 or email us at, or fill out the short form below with your enquiry.

About our expert

Adam Kudryl

Adam Kudryl

Chief Legal Officer & Head of Corporate
Having qualified as a solicitor in 2003, Adam has over 20 years' experience in advising businesses on their growth and exit strategies. Adam joined Harper James as a Partner in 2018 and became Head of Corporate in 2022. As of April 2024, Adam’s new role is Chief Legal Officer & Head of Corporate. In this role, he is responsible for the legal services aspects of Harper James and for defining the firm’s strategic vision and objectives to achieve our long-term goals, together with our CEO, Toby Harper, and the other senior leaders.

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