Limited Company vs. Sole Trader

Accountancy & Bookkeeping

Limited Company or Sole Trader

When you are setting up a new business, one of the first decisions you will have to make is whether you want to be self-employed as a sole trader or within a partnership or start a limited company.

Each structure has different pros and cons, so it is important to ensure you have a good understanding of each before you proceed. The choice you make is likely to have implications for the future, so it is vital to opt for the most suitable, considering all your circumstances.

Below are some of the main differences between limited companies and sole traders.


As a self-employed sole trader you will be taxed via self-assessment on an annual basis. Profits cannot be deferred to future trading years. You will receive a personal tax allowance. For 2014-15 this is £10,000. Any profit over this amount will then be taxed at 20, 40 or 45 per cent, according to the profits received. National Insurance (NI) will also be due on any profit made.

Limited companies must pay Corporation Tax on profits. From 1st April 2015 this is 20 per cent on annual profits. A limited company can choose to retain profits. These can then be distributed as dividends in later tax years. During particularly good years, directors may wish to delay income tax payments by deferring dividends to the next tax year.

Benefits of Limited Company vs Sole Trader

One of the biggest benefits of starting up a limited company is that business and personal finances remain separate. Losses within the business cannot be offset using personal funds. This is not the case as a sole trader, where personal finances may be taken into account in the event of a claim against the business.

As a sole trader, paperwork and start-up tasks are minimal. Once HMRC have been informed about your intention to be self-employed, you can begin trading immediately. A limited company, however, requires slightly more work. Directors have a number of statutory and legal obligations to fulfil. Limited companies must be registered with Companies House and are required to file accounts on a yearly basis.

In terms of tax, directors of limited companies may pay less tax. This is because they can receive income in the form of dividends, which are free of NI. On the other hand, any salary you pay yourself as a sole trader will be liable for both tax and NI.

As a limited company, mergers, acquisitions and sales can be undertaken more easily. Many people also find that other businesses prefer to work with limited companies rather than sole traders. In addition, opportunities for expansion or introducing additional funds are often easier for a business with a limited company status than for those working as sole traders.

If you’d like to speak to someone regarding how to set up a new business, call Allsquare on 0131 343 1510.