WellTax Blog

How to choose between operating as a sole trader or a limited company?

October 31, 2022

One of the first and most important decisions you must make when becoming an entrepreneur is whether you want to operate as a sole trader or a limited company. In this article we outline the key differences between the two options.

Sole Trader

In terms of registration and administrative requirements, becoming a sole trader is the easiest option. Furthermore, since there is no legal distinction between your personal finances and those of your business, you don’t have to go through any formal complex process to withdraw money for personal use.

Bear in mind, however, that the absence of this legal distinction implies that you would be fully liable for all trading debts and liabilities personally. This means that if, for example, you were unable to pay your debts or if legal action was taken against the business, your home and other assets would be at risk.

Many small business owners prefer the sole trader structure, particularly freelancers with a few clients and/or an annual income under £25,000. The formation of a limited company might, however, be advantageous from a financial or professional standpoint in the future.


  • Online setup is quick and start-up costs are minimal;
  • Low costs and simpler accounting requirements;
  • Minimal documentation and record-keeping needs;
  • All business earnings and assets are yours and can be easily withdrawn for personal use;
  • No requirement to make business records available for inspection;
  • No need to register with Companies House, therefore more privacy;


  • Limitless personal responsibility for debts and legal claims;
  • Greater difficulty in obtaining loans and raising capital;
  • Income tax of 20-45% is due and profit cannot be distributed as dividends;
  • Sole traders are less credible, compared to limited companies;
  • The business name cannot be protected as it is not registered.

Limited Company

Creating a limited company is a popular choice for people starting a trade. People do business and enter into contracts with the company and not with the person. The business is run by the latter but legally there is an arrangement between the owner and the company.

  • Limited liability: the most significant advantage of constituting your own company is the limited liability protection. This is because a limited company is treated as a distinct legal entity. As a result, the company is distinct from the people who own and manage it. Any debt, losses, or legal claims incurred by the company are the sole responsibility of the company, not its owners (shareholders/guarantors) or directors. If your company is unable to pay its creditors, you will only have to contribute the nominal value of your unpaid shares. Aside from that, your personal assets will be protected.
  • Professional status: once you begin running a business as a limited company, your status and reputation in the industry will significantly improve. Companies are held in much higher regard and make a better impression than individuals. This is because limited companies are subject to more stringent statutory compliance obligations, more complicated accounting and reporting requirements, and the publication of their corporate information and financial statements online for inspection by the public and other businesses.
  • Tax efficiency and planning: currently, limited companies in the UK pay only 19% Corporation Tax on their profits, compared to the 20–45% Income Tax paid by sole traders. This gives you more options for tax planning. You can keep excess income in the business to cover future operational costs and expansion rather than taking out all the available profits each year and paying additional personal tax on top of your Corporation Tax liability. This is a better option than taking all your profits out of the business, paying higher income taxes, and reinvesting your money when the company needs more money.
  • Separate legal entity: in contrast to a sole trader, a limited company is a legal ‘person’ in its own right, with an entirely separate identity from its owners and directors. Besides that, companies have perpetual succession, which means they survive the death or ownership of the original members. The company can be sold or transferred to another person at any time, allowing it to expand.
  • Investment and lending opportunities: since businesses can have multiple owners, selling ‘shares’ to new investors is one way to raise additional funds. Companies generally have access to more lending opportunities than sole proprietors, and some banks will only lend to incorporated businesses. Additionally, it is often possible to secure a loan for a company without the need for shareholders or directors to put up their property as guarantee.
  • Income distribution: if you are the owner of a limited liability company, you may give shares to your spouse or other family members. As a result, your tax obligations will be reduced, and your business profits can be divided. You can benefit from your spouse’s and children’s tax-free Personal Allowance, standard tax rate, and £2,000 tax-free dividend allowance by issuing dividends to them, for example.
  • In order to withdrawn money from the company you need to follow strict procedures;
  • More time-consuming and complex accounting requirements, which means you may need to appoint an accountant to assist you with your taxes;
  • Strict record-keeping requirements, including taking minutes of directors/shareholders meetings and maintaining company registers for public inspection;
  • Each year you have to submit accounts and confirmation statements to Companies House and accounts and corporate tax returns to HMRC;
  • Personal and corporate information will be disclosed on the public record and any changes made to your company information have to be notified right away.

We can conclude by saying that the decision on whether to operate as a sole trader or a limited company depends on individual needs, with advantages and disadvantages on both side.

If you do not expect to generate significant profits and do not have much experience, the sole trader route is undoubtedly the easiest in terms of practicality and cost.

If, on the other hand, you expect to make higher profits and have the capital to invest and experience in the sector, the limited company option is probably the best.

Do not hesitate to contact us if you want to know more or need support with this.

Camilla Formicola


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