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Pros and cons of a Sole Trader vs a Limited Company

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We'll tell you whether a sole trader of Ltd Company is better for you

Are you thinking of setting up your own business? For many would be entrepreneurs the idea of starting a business can be a life changing experience. There are many important issues to bear in mind when you consider how to start a business.

Before embarking on starting a new business it is important to consider what you will be giving up when going on this journey. Setting up a business requires a very different mind-set to working for someone else and in the early years you may find that money is tight, you have no time for holidays and that you are working long hours for little reward.

However, if you can make your own business a success then the rewards both personally and financially can be outstanding. For many people being in control of their own destiny can be a very fulfilling experience. In this guide, we will outline some of the essential areas that need to be focused on as a first step in setting up a business for the first time.

Business structure

Many people assume that everyone who has their own ‘business’ runs a ‘company’.  However, the two words do not mean the same thing.

There are four main types of business structure:

  • a sole trader – this is the simplest way of starting and running a business.
  • a conventional partnership – where you work with one or more partners in the business.
  • a limited liability partnership – LLP – this provides you and your partners with the protection of limited liability, just as with a company.
  • a limited company – this means that the business is quite separate to you as a person. It also means that you cannot simply draw money from the business whenever you feel like it.

Which approach is right for you will depend on a number of factors. These include your cashflow projections, your long-term plans for the business, whether or not you need the protection of limited liability, your willingness to comply with legal and administrative obligations and the nature of any investment you are seeking.

The most common choice is usually between starting in business as a sole trader or setting up a limited company. We have compared some of the most important pros and cons of each of these structures below.

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Sole trader

The simplest and most straightforward way to open a business is as a self-employed sole trader. As a sole trader, either on your own account or in partnership, you run your own business as a self-employed entity. A sole trader needs to ensure they are registered with HMRC and must file a tax return annually. They may also need to register and account for VAT. This allows for a relatively easy set up in the early years of a business. A self-employed individual effectively treats both their business and personal tax affairs as one with profits treated as income and taxed accordingly.


  • Low set-up and running costs compare to other options.
  • Relatively straight forward tax returns (using self-assessment).
  • You can take on employees like any other business.


  • If the business becomes insolvent, creditors will be able to access your personal assets (including your home) to obtain payment of their debts. Dependant on the business you are starting up, this can create a significant amount of risk.
  • Can be hard to raise finance.
  • Not seen as prestigious as other business types.
  • At higher levels of profitability, it will usually be beneficial to incorporate your business to save tax.

Limited company

Operating a limited company can be far more complex than other options. In order to set-up a limited company the company must be registered with Companies House and at least one Director must be nominated. The formation process can be complex and HMRC will of course also need to be notified.


  • Separation of business and personal finances. The limited company is a separate legal entity, and the actions of the company are not legally ascribed to you.
  • Your liability is limited to your shareholding invested in the company.
  • Tax rates are usually lower for companies although your salary will remain liable to personal tax.
  • Makes it much easier to expand and grow your business.
  • Some businesses will only work with limited companies as there are more checks and balances. This can also enhance the appeal of your business and make it easier to raise finance.


  • Far higher administrative burden than other options. The company is its own entity and must meet many filing requirements.
  • Directors are responsible for making statutory filings to Companies House and may have some personal liability if asked to provide personal guarantees when borrowing money.
  • A lot of information about the company and the directors are available publicly which some can find intrusive.

VAT registration

If you are in business, including as a sole trader or a limited company you will also be required to register for VAT if you meet either of the following two conditions:

  1. At the end of any month, the value of your taxable supplies made in the past 12 months or less has exceeded £85,000; or
  2. At any time, there are reasonable grounds for believing that the value of your taxable supplies to be made in the next 30 days alone will exceed £85,000.


There are lots of aspects to consider when starting your own business. We are always available to discuss the options with you. Please don’t hesitate to get in touch.

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