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Trading styles and tax rates can feel like a minefield to many small businesses! The sole trader vs limited company conundrum isn’t going anywhere and can make quite a difference to your operations.

Most companies start as a sole trader and then reach a point where they’ve grown and need to decide whether to stick or twist – and choosing whether to trade as a sole trader or limited company can feel like a high-stakes decision!

Let’s run through exactly what each of these trading styles means and the pros and cons.

What is a sole trader?

First, we’ll rewind a little and clarify what a sole trader is; and do you have to incorporate it into a limited company?

In short, a sole trader is someone who runs their own business and works for themselves.

You’ll need to register with HMRC if:

  • You earn over £1,000 in the tax year
  • You’d like to make voluntary National Insurance contributions
  • You need to evidence your self-employment to access benefits such as childcare

There isn’t any difference between self-employment and being a sole trader, only in the terminology.

Many people who work freelance are sole traders, so that could be bookkeepers, hairdressers, plasterers and landscape gardeners, as a few examples.

You don’t have any obligation to incorporate and can continue as a sole trader if you’re happy that’s the right option for your business.

Should I be a sole trader or limited company?

So, as we’ve mentioned, lots of small businesses start as sole traders. Then, they expand, begin to make higher profits, and need to take on somebody to help manage the workload.

It’s often at this stage that the sole trader vs limited company debate begins!

Many people are put off by the idea of filing accounts and making information public that they can keep confidential as a sole trader.

However, one of the most significant plus points to becoming a limited company is that you have legal autonomy from your business.

What is a limited company?

Limited companies are registered with Companies House. They are:

  • Independent legal entities – i.e. if the business were in financial difficulties, that wouldn’t impact your personal assets or finances
  • Bound by filing rules – you’ll need to submit annual accounts and confirmation statements confirming the shareholding split and how much profit you made
  • Owned by shareholders (and that can be just you!) and run by directors

Small companies might be owner-managed and have one person with 100% of the shares, who is also the company director.

Incorporating a limited company doesn’t mean anything fundamental about your business has to change.

Sole trader vs limited company – pros and cons

As we’ve mentioned, there are positives and negatives to trading as either a sole trader or limited company.

Yes, you’ll have to file documents, but likewise, you’ll probably pay less tax as a result and cement the status of your business.

Advantages of trading as a sole trader:

  • Little paperwork (apart from your annual self-assessment return.
  • Simple to set up
  • Better privacy, since you don’t need to submit details to Companies House
  • Avoiding limited company rules around filing annual accounts and returns

Advantages of trading as a limited company:

  • Limited legal liability, as the company is separate from your personal finances
  • Tax-efficiencies, with corporation tax rates usually lower than self-employment rates
  • Access to tax allowances and deductible costs to reduce your tax bill
  • Rights to your registered company name
  • Easier access to lending and business banking products

It’s always a personal choice and depends on your business, turnover, tax exposure and plans.

We’d recommend seeking guidance from the Accountants East London team if you’re still in any doubt about whether a sole trader or limited company status is right for you!

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