Business formats explained: Should you register as a sole trader or a limited company?
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We've written an expanded version of this popular article. Stay here for a quick read or visit our guide - UK Company Structures and Business Formats - for more in-depth information.
The pros and cons of sole trader vs limited company
What is a sole trader?
A sole trader means you maintain complete control over the business, keeping all the profits after tax. The law will not distinguish between yourself and your business, meaning if the business runs into trouble, you will bear all the legal and financial responsibility. Setting up as a sole trader is the easiest option if you are the only owner of the business and HMRC says 60% of UK businesses use this format.
What are the pros of being a sole trader vs being a limited company?
| Sole trader | Limited company |
|---|---|
| Simplest form of business structure | You are separate from your business and have limited liability for losses |
| Least admin of all structures | Reduced tax liability in certain circumstances (when taking dividends) |
| More privacy | More effective for tax above certain earnings |
| Keep all the profit | |
| You retain full control of your business |
What are the cons of being a sole trader vs being a limited company?
| Sole trader | Limited company |
|---|---|
| You are the business; you’re liable for any losses | Subject to more public scrutiny / less privacy |
| Some businesses prefer to work with limited companies | Potential shareholders to share the profit with |
| Registering as a sole trader is the easiest option | Less autonomy / control of your business |
| You bear all legal and financial responsibility | More complicated structure and admin |
Check out our article on 5 things to know about setting up as a sole trader.
What is a limited company?
A limited company is a separate legal entity to its directors, limiting how much the owner is liable if the business runs into trouble.
Setting up as a limited company could be more tax-efficient. You'll pay Corporation Tax rather than Income Tax. The profits belong to the company, rather than you, so you are paid as an employee. If you chose to become a shareholder, you can take dividends as well.
Setting up a limited company is more costly and requires more administration than registering as a sole trader, but in the long term, it's less of a risk.
A limited company is a separate legal entity to its directors
You are paid as an employee and can choose to take dividends
Setting up is costlier and more time-consuming but less of a risk
Things to consider
Registering a company can be hard work, especially if you're doing it for the first time, so you might want to consider engaging the services or advice of someone with experience. If you're unsure as to what format to choose, speak to a solicitor or accountant who should be able to help, while a formation agent will help speed up your registration. Alternatively, try an online registration company which will be cheaper.
If you're confused, speak to a solicitor or accountant
A formation agent will speed up the process
An online registration company will be cheaper
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