When you’re starting or growing a business, one of the first big decisions you’ll make is choosing the right legal structure.
Should you trade as a sole trader or set up a limited company?
It’s a choice that can affect everything from how much tax you pay to how much paperwork you have to do.
If you’re feeling a bit stuck, you’re not alone.
Let’s break down the key differences to help you decide what’s best for your business.
Sole Trader: Simplicity and Control
Being a sole trader is the simplest way to run a business.
You’re in charge and have full control over decision-making and the direction of the business.
You’ll pay income tax on your profits via self-assessment and pay Class 2 and Class 4 National Insurance contributions.
You’ll also need to register for VAT if you hit the threshold (currently £90,000).
The main downside? You’re personally responsible for any debts or liabilities the business incurs.
There’s no legal separation between you and the business.
Limited Company: More Protection, More Paperwork
A limited company is a separate legal entity from you.
This means your personal finances are generally protected from business debts, provided you’ve acted legally and responsibly.
The company will pay corporation tax on its profits, and you can take money out of the business through a combination of salary and dividends.
This can often be more tax-efficient, depending on your circumstances.
On the flip side, there’s more paperwork: annual accounts, corporation tax returns, and confirmation statements, plus the need to register with Companies House.
Key Things to Think About
Taxes and Profit
As a sole trader you’ll pay income tax on all profits you make (not sales).
Limited companies pay corporation tax on profits and then personal tax on dividends or salary you pay yourself.
Depending on your income level, one may be more tax-efficient than the other.
At Legacy Figures Accountancy, we focus on your finances so you can focus on your business.
Want to learn more? Let’s have a chat.
Liability
As a sole trader, you’re personally liable for business debts.
As a director of a limited company, your personal assets are generally protected.
Depending on your situation, this may be a key factor for you.
Administration
Limited companies have more admin, including annual accounts and Companies House filings.
Sole traders have simpler tax reporting via self-assessment which is done once a year.
Perception
Some customers and suppliers may view a limited company as more established and trustworthy.
It can sometimes open doors to bigger contracts or partnerships.
When to Switch from Sole Trader to Limited Company
Sometimes, it makes sense to start as a sole trader and switch to a limited company later on.
You might consider making the switch if your profits are increasing and you want to explore more tax-efficient ways to pay yourself.
It can also make sense if you’re taking on larger contracts, seeking more credibility with clients, or if your business is growing and you’d like the personal liability protection that a limited company offers.
Final Thoughts: What’s Right for You?
Choosing between sole trader and limited company depends on your business goals, income level, and how much admin you’re comfortable with.
If you’d like help weighing up the pros and cons or want to switch structures, we’re here to help.
👉 Book a free consultation today and let’s find the best fit for your business.
