Home Business Insights & Advice Five things to consider when setting yourself up as a sole trader or limited company

Five things to consider when setting yourself up as a sole trader or limited company

by Sponsored Content
29th Apr 19 11:01 am

When starting your own business, it can be daunting trying to decide whether you should become a sole trader or form a limited company.

They both share some similarities, but there are some key differences which you should know about first, before making any decisions. This article will explore 5 things you need to consider when making your decision, but first what is a sole trader and what is a limited company?

What is a sole trader?

If you choose to become a sole trader, you will be self-employed and you will own 100% of the business. You ultimately will be able to capitalise on any post-tax profits you make, as you will be able to keep all of them.

Currently, 59% of all businesses are run as a sole trader and for many it is seen as the simplest option when starting up your own company.

What is a limited company?

When you set up a limited company, you and the business are separate entities, and therefore you have limited liability. Within the company, you will have a director, shareholders and possibly employees, and your business finances are kept separate from your personal finances.

There are 1.9 million limited companies currently operating in the UK and they offer you the chance to build a unique brand and company.

Now that you know the difference between a sole trader and a limited company, it’s time to take into consideration 5 things that could affect your decision.

What type of customers do you have?

It’s important to note that some customers and businesses will view a limited company as being more professional, and therefore prefer to only deal with limited companies.

There is a public perception that dealing with a limited company means that the business is large and trustworthy, in comparison to sole traders who are self employed and work alone, for themselves. This is not to discredit sole traders, but it is important to think who your customers are and how you should be presenting yourself to them.


With limited companies, you have a distinct protection that sole traders don’t have. If you are a sole trader, you are the business, which means that any debt from the company can be personally placed against your name.

If you are a limited company, any debt from the company cannot be placed against you because you and the company are separate entities.

For example, if something went wrong and you had to close down but you still had outstanding payments, then customers or businesses could still challenge a sole trader for the money as the person is not separate from the business. But if you are a limited company, you have limited liability and therefore they could not challenge your personal finances, only the closed down business’.

Financial Considerations

Money is at the forefront of any start up business and you need to weigh up the costs involved in being a sole trader or a limited company, to find out which one you are better off financially with.

First, it’s important to figure out how much you plan on earning each your. This will depend on a variety of factors, including what type of work you are doing and your business plan, and you will need to compare costs involved, such as profit, corporation tax, self employed tax rates, dividends and set tax rates.

This is an important step in your business plan and it will vary depending on the goods or services you offer. For example, outgoings will differ with a freelance writer and a tradesperson. Freelance writers will need to consider initial set up costs such as a laptop and writing tools, but the core ongoing cost will be your time. Tradespeople will need to consider initial set up costs such as your tools, any trade memberships and transportation, but the ongoing costs will be far greater than that of a writer, as you will need to think about materials for each job you take on.

With large companies, such as Carillion, going bust without paying sub-contractors, this ultimately leaves tradespeople vulnerable to having to cover the costs of materials they have already bought. For this reason, it’s important to think about contingency costs in your business plan.

One cost to consider for both sole traders and limited companies, is the cost of hiring an accountant to help handle your finances. You don’t necessarily need an accountant if you are sole trader, but you will need one for a limited company. Even though you can handle much of the financial aspects by yourself, having an accountant will help save you money in different parts of the business.

Tax implications

Every year, sole traders are required to fill in a self assessment tax return online by 31st January for the previous tax year. You will then be sent a tax bill to pay from HMRC. This process of accounts is arguably the simplest, as it avoids paperwork which is required from limited companies, such as corporation tax, VAT returns if applicable, and annual accounts.

When you become the director of a limited company, you can also become a shareholder of the business, which means you that you will pay yourself and any other shareholders dividends. These are an additional salary, which is paid out to shareholders when the company makes a profit. On these dividends, you will be required to pay tax on any dividends over £2,000 and the tax rate fluctuates depending on the tax band.

For those who are named a company director and shareholder of a limited company, you will have to file a self assessment tax return online by 31st January, the same as a sole trader. You will then be sent a tax bill to pay from HMRC. You will also be required to submit your audited account to Companies House every year.

Setting up your business

Whether you are setting up your business as a sole trader or limited company, you will be required to pay a fee; the difference in the cost is minimal so this should not affect your decision. However, the process of registering for each is different.

Setting yourself up as a sole trader is arguably the easiest option, as you will simply need to notify HMRC by registering for a Self Assessment online and then file a tax return every year. You will be required to keep records of your business expenses and also sales.  You can find out more about the process on the Government Sole Trader page.

Setting yourself up as a limited company is not as simple, but it gives you a uniqueness that a sole trader doesn’t have. Two sole traders could have the exact same company name, which could undoubtedly cause some confusion amongst customers. However, no two limited companies can have the exact same company name.

The process of setting up your limited company begins with choosing your own unique company name, before then appointing directors and shareholders, and then registering your company with Companies House. You can find out more about the process on the Government Limited Company page.

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