Sole Trader or Limited Company? Pros and Cons

7 months ago

So, you’re ready to be self-employed and start up your own business. You’ve done your research, planned your finances and now it’s just down to the practicalities. One of the first practical decisions is about whether you go down the route of being a sole trader or setting up as a limited company. It’s a pretty tricky decision in the beginning because each has their own set of advantages and disadvantages and the descriptions given on the government websites don’t really help to make the decision for you. Below, you’ll find information about the pros and cons of each which will hopefully help you to decide whether being a sole trader or setting up a limited company is best for you.

What is a Sole Trader?

This is the most popular business type in the UK and a common first step for freelancers. As a sole trader, you are the business. This means contracts you have with clients are between them and you personally.

What is a Limited Company?

This business structure has its own legal identity which is separate from its owner(s). When you run a limited company, you are known as the director, which means you are responsible for legal and financial decisions made but that the assets and liabilities are separate from your own individual finances.

It also means that your clients have contracts with the company and not directly with you. The company is its own legal entity.

Sole Trader vs Limited Company

Now that you have a clearer idea of what each form of business is, how do you decide between them? Below, you will find a series of pros and cons for both choices so that you can weigh them up and make a better-informed choice.

Pros and Cons of Being a Sole Trader

Both options have their pros and cons. The main benefits of being a sole trader are:

  • Easy to set up and minimal paperwork
  • Starting costs are low
  • No need for details about you to be publicly available on Companies House
  • You have the flexibility to change your legal structure later should you wish to do so

However, there are downsides to trading as a sole trader too. The main ones:

  • Unlimited liability, which means any and all business debt is also your own. If things go wrong, you can lose personal assets
  • Banks and lenders tend to prefer limited companies, so raising funds can be harder
  • There are fewer tax efficiencies you may benefit from (such as paying yourself in dividends for part of your income). You need to speak to a specialist about tax though.

Pros and Cons of Starting a Limited Company

Again, opting to trade as a limited company comes with a string or pros and cons. The main benefits are:

  • Limited liability, so you only risk losing what you put into the company. In other words, if someone sues you or you incur unmanageable debts, these are the debts of the company – not your personal debts.
  • More tax efficient, in general, than being a sole trader, depending on your personal income level. We’d suggest speaking to a tax specialist about that before making the decision.
  • Once you register a name no one else can use it (unlike sole traders)
  • Generally, a limited company is often perceived as more credible. Some businesses will only do business with other limited companies, for example. And if you plan to raise funding for your business, you’ll find many lenders and investors will require you to be set up as a limited company.

The main disadvantages of setting up as a limited company are:

  • Lots of added responsibilities, especially legally and financially. This can make running the business a lot more time-consuming and expensive
  • Not all of the money is yours and you must pay yourself a wage through official processes and pay corporation tax on company profits.
  • Some people are concerned by a lack of privacy, as a limited company must be listed on Companies House along with information about its directors (you!).

To Conclude

In the end, it all depends on the nature of your business and which format suits you better. No matter which you think is best, the most important thing is that you don’t rush into any decisions. You should take your time to carefully consider each option, and speak to an accountant if it’s possible. You can also chat to other business owners online to get their thoughts and advice. You have time, so take it. 

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