Sole Trader vs Limited Company

Sole Trader:

What is a Sole Trader?

• A sole trader is a self-employed person who is the sole owner of a business.
• The profit or loss of a sole trader is reported on a self-assessment tax return with HMRC.
• Profits will be taxed using income tax rates after the personal allowance has been utilised – currently 20/40/45% dependent on your total level of income in a tax year.
• You will pay Class 2 National insurance of £3.05 per week if your profits exceed £6,515.
• You will also pay Class 4 National Insurance of 9% on profits between £9,569 and £50,270 and 2% on profits in excess of £50,270

Advantages of being a sole trader:

• It’s easy to set up and involves very little paperwork
• None of your documents are available to view on the public record and so remain completely private

Disadvantages of being a sole trader:

• You are personally liable for any debt owed therefore your personal belongings and property are at risk
• Banks and other lenders can often prefer Limited Companies so raising finance can be a little more difficult.
• Once you reach a certain level of profits (usually around the £30,000 mark) you will pay more tax than if you operated as a limit company

Limited Company:

What is a Limit Company?

• A Limited Company is a business that is an entity in its own right. It is separate from the people that own and run the business.
• Usually, the owners of the business will have shares in the Company, and it will be run by the directors of the Company. A person can be both a shareholder and a director.
• A Limited Company must be registered with Companies House and follow the rules of the Companies Act.
• A set of annual accounts and an annual confirmation statement must be filed with Companies House and a CT600 tax return must be filed with HMRC.
• Profits are taxed using the rates of corporation tax – currently 19%.

Advantages of a Limited Company:

• The company is a separate legal entity therefore you are only liable for the investment you made in the business.
• Banks and other lenders are often more willing to lend to Limited Companies
• Above a certain level of profits (usually around £30,000) – you will pay less tax than a sole trader. The higher the levels of profits the more tax you will save.

Disadvantages of a Limited Company:

• Limited Companies have more responsibilities and more paperwork to complete than sole traders. This often leads to an increased cost in accountancy fees.
• Certain information is available on the public record with Companies House.

There is no definitive answer as to whether you should be a Sole Trader or a Limited Company as each person’s needs are different. If, having weighed up the pro’s and cons of each, you are still unsure which option is right for you then please get in touch with us and we can help you make the right decision for you and your business.