WellTax Blog

Not sure between LTD company or sole trader?

September 26, 2018

Starting a new business? Are you already a sole trader? When should a sole trader become a limited company? Our article shows you how such a choice will affect an entrepreneur tax, legal and financial responsibilities.


Who is a “sole trader” and what is an LTD?

A sole trader is essentially a self-employed person who is the sole owner of a business. It is the simplest business structure, which is also the most popular and easy to set up.

A limited company is a type of business structure that has its own entity. The LTD is separate from its owners (shareholders) and its managers (directors). This setting will be the same even if it is run by one person, acting as the sole shareholder and director.


The pros and cons of these business structures are highlighted in 3 main areas as:

  • Tax duties and bureaucracy;
  • Limited/unlimited Liability;
  • International appeal and reputation.


Advantages of a Sole Trader

Easy to set up and with less tax compliance (self-assessment tax return).

You pay Class 2 and 4 National Insurance and Income Tax on the taxable profits of your business. For instance, if your profit is below £11.850 (2018-2019 personal allowance) you don’t have to pay any Income Tax.

There are no requirements for you to prepare and file accounts to Companies House (you will be only dealing with HMRC). However, it will be difficult to work out your profits without having a defined organisational structure. We would recommend keeping track of your revenues and costs to understand how much tax you owe. It is also essential to keep records of your business transactions as it is required by law (5 years for the sole trader and 6 years for the LTD).

The sole trader has more flexibility with the business funds as both business and individual are the same entity.


Disadvantages Sole Trader

Sole traders have unlimited liability. As mentioned in the pros, this business structure is not a separate entity by the UK law. This means that if the business has debts, the creditor can take the sole trader’s personal assets to pay all of the debts.

Raising finance can be tricky, as banks and other investors tend to prefer limited companies. This issue limits the business expansion if you are a sole trader.

Tax rates on sole traders are not always as “kind” as they are on limited companies. When you reach a certain level of earnings, it might not be quite as tax efficient to be a sole trader.


Advantages of LTD

Unlike a sole trader, the company’s shareholders have limited liability. There is a legal distinction between the business owner and their business. This means that personal assets aren’t exposed. You only lose what the capital invested in the company.

Limited companies are usually more tax efficient than sole traders, as rather than paying Income Tax, they have Corporation Tax on their profits. In most cases, this solution offers a kinder tax rate, meaning that a limited company can provide with various taxable benefits (E.g. Employment Allowance).

Being an LTD will give you more prestige than a sole trader. It can be very important for some suppliers and customers (mainly outside the UK). These stakeholders will not trade with unless you are an LTD.


Disadvantages of LTD

Having a limited company brings different responsibilities. These obligations are for instance the confirmation statement as well as the annual accounts.

You must prepare annual accounts under the provisions of the Companies Act, this statutory requirement can be abbreviated for filing with Companies House.

Under certain circumstances, the director may be personally liable for the company’s debts and other losses. However, the members of a limited company are not liable (in their capacity as shareholders) for the company’s debts.


Finally, it is essential to understand the difference between a sole trader and limited company. By choosing the right company structure, you will make a different impact on your business strategy. If you do not expect to have high profits and you are not an expert entrepreneur, you may want to choose to start your business as a sole trader. However, if you’d expect to make a high turnover and are knowledgeable about your industry and customer demand, you should opt for the LTD.

Therefore, do not rush into any decision and speak to an accountant if you are unsure, as professional expertise can be valuable when it comes to evaluating your accounting/tax side of the business, contact us

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