GMT Accounting Ltd

Sole Trader v’s Limited Company

When you start a new business venture, sometimes it’s hard to know whether you are best setting yourself up as a Sole Trader or a Limited Company. Below are some of the pros and cons of both types of business that will hopefully help you decide.

Limited Companies – These are business organisations owned by individuals, known as shareholders, who contribute the capital of the business by buying shares. Limited Companies have their own legal identity which is separate to that of its shareholders (owners).

Sole Trader – This is a business that is owned by a single person. It is regarded as being an unincorporated business which means that the law makes no distinction between the business and its owner.

Being a Limited Company gives the impression of being a larger business than a Sole Trader and can make your business seem more credible to new potential clients or customers.


A Limited Company enters into contracts, etc, in its own name and the Company is liable for its own debts so each shareholder’s liability is limited to the amount they have invested in shares.

A Sole Trader has unlimited liability which means there is no distinction between private and business wealth, so, should the business fall into debt the owner may be forced to sell off private investments to raise funds for the business.


Limited Companies are charged Corporation Tax (currently 19%) on their profits. Tax will be deducted from directors’ salaries via Pay As You Earn (PAYE) and Dividend Tax is payable on dividends paid over the tax-free Dividend Allowance (currently £2,000).

Sole Traders pay tax on their business profits via the Self-Assessment Tax Return system.

National Insurance

Within a Limited Company, both Employers and Employees National Insurance is payable on directors’ salaries and bonus payments.

A Sole Trader will pay Class 2 National Insurance (currently £2.95 per week) and Class 4 National Insurance on profits over Lower Profits Limit (currently £8,424).

Accounts and Tax Returns

A Limited Company must prepare Annual Statutory Accounts. These must be filed with Companies House and HMRC as part of the Company Tax Return. A Confirmation must also be filed with Companies House each year which confirms information about the directors, shareholders and registered office.

Sole Traders are not legally required to prepare or file Annual Accounts but they must declare their income and expenses via their Self-Assessment Tax Return.


There are advantages and disadvantages to being either a Sole Trader or a Limited Company. You can change from being a Sole Trader to a Limited Company, and visa-versa although going from a Limited Company to a Sole Trader is much less common. Hopefully this article has given you some information on which to make a decision on.