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The Top Advantages Of Being A Sole Trader Vs A Limited Company

There are so many options to choose from when setting up a new business. Sometimes, you get lost in which one to pick that it holds you back from the important things you need to do to get set up, running and making a profit. 

Being a sole trader is a great option for many new businesses. In fact, sole traders made up 60% of small businesses in the UK, with 3.5 million sole traders in 2019. 

If you’re thinking of becoming one, we’ve put together a list of the top advantages of being a sole trader to help make up your mind. 

But first, let’s look at what a sole trader is and how that compares to a limited company.

What is a sole trader? 

First of all, let’s clarify what being a sole trader is. 

A sole trader is a business owned by a single person. That means there’s a single person responsible for handling all the decisions, taking responsibility for the company and ultimately keeping all the profits. 

They can be funded by their own savings, bank loans or personal loans. 

What is a limited company?

A limited company is a registered company that has shareholders who have an active interest in the company making money.

The shareholders will recieve a share of the declared profits of the company depending on the number and type of shares they own. Limited companies can be owned by a single person and shareholder or multiple people.

Limited companies have more legal responsibilities than sole traders but also offer more options available to improve tax efficiency for their owners.

Should you be a sole trader or limited company?

One of the first major decisions you are likely to make when starting a business is whether to setup as a sole trader or limited company.

Put simply, there is no right or wrong answer – the right decision for your will depend entirely on your individual circumstances and the kind of business you are starting.

What you will need to do is look at the pros and cons of both types of business and decide how a sole trader or limited company setup will affect you and the benefits each approach will give you.

Main Advantages of a Sole Trader:

  • Less paperwork – you’ll still need to keep records but you won’t have to record as much detail
  • Lower costs – because there is less paperwork, you will not need to pay an accountant
  • Can be more friendly – some customers prefer dealing with individuals rather than companies
  • Faster progress – as there is only one decision maker (you!), progress can be faster and more direct

Main Advantages of a Limited Company:

  • Less risk – the company is liable for debts not you!
  • Tax efficiency – it is far easier to control how much tax you pay and rates are often more favourable
  • Professionalism – a limited company is often seen as more trustworthy and serious
  • Financial backing – it’s usually easier to gain loans and investments when trading as a company

With these in mind, many people do find that forming a limited company is a more appealing option. In fact, many people who start off as a sole trader soon switch to a limited company once they begin to grow in size.

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What are the advantages of being a sole trader?

If you still think a sole trader may be the best option for you, let’s take a look at the various advantages of being a sole trader in a little more detail…

1. Greater control of your business 

Being a sole trader means you have ultimate control of your business. You are your own boss, you make your own decisions and you are responsible for everything that happens. 

There’s no need to consult shareholders or directors. You can run your business exactly how you choose. 

Of course, you could still operate as a limited company and be the sole director and sole shareholder. This will give you a similar level of control as operating as a sole trader but with a few more regulations to avide by.

2. More flexibility 

One of the advantages of being a sole trader is that you can manage your schedule and take all the decisions without asking for permission to anyone.

Because you’re the only one making decisions about your business, it’s also easier to adapt to new changes as a sole trader. 

If you want to expand your offering, change prices, or adjust your hours, you can do it instantly. There’s no one else that you have to approve these changes by, making it a great option for those who are fitting a business around a busy lifestyle. 

3. It’s easy to get started

Setting up as a sole trader is incredibly simple. All you really need to do is inform the HMRC and register as self-employed. 

We’ve listed the steps you need to take later on in this article.

4. Low setup costs 

One of the main advantages of being a sole trader is that when you set up, you don’t need to pay any fees to form a company with Companies House. 

It’s free to register as a sole trader with the HMRC, meaning you can set up a business for nothing. Being a sole trader means you can also use your own savings or personal loans to fund your business as well, meaning more flexibility with your finances. 

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5. Low cost accounting

The average accountancy costs for businesses can vary. But as a sole trader, this cost tends to be a lot lower than being a limited company, as your accounting process is much simpler. 

That’s because sole traders don’t have to fill out formal Annual Accounts or Corporation Tax Returns. However, you will need to maintain records of your invoices, expenses and submit a personal Self-Assessment Tax Return. 

If you hire an accountant, you’ll pay much less than a limited company because there’s less work that needs to be done. It’s also much easier to take care of your accounts yourself, cutting that cost entirely. 

Need some help with your accounting? Take a look at the best self-employed accounting software that you can use here. 

Recommended Course:

Includes:

  • How to do bookkeeping manually
  • Prepares you for using bookkeeping software correctly
  • How to complete a VAT return
  • How to prepare a profit and loss account
  • How to prepare a balance sheet
  • Includes downloadable templates
  • Plus much, much more!

6. Less forms and red tape

As a sole trader you will not have to fill out as many forms as if you would be a limited company.

Not only do sole traders have less accounting to do, but they also have fewer forms to fill out and red tape to cross. 

As a sole trader, you don’t have to file a confirmation statement or any of the other myriad of documents that a limited company may need to do so. Most of this is down to the fact that you won’t need to manage shares of your company or appoint directors – as everything is already under your sole control. 

You can find out what legal obligations you have as a sole trader here. 

7. Access to tax allowances 

Sole traders can claim capital allowances on certain expenses, such as the equipment you might need to operate your business. This can include IT equipment such as a computer, tools and machinery, vehicles or even office furniture. 

This tax relief can be a helpful advantage to sole traders, but it is worthing out that limited companies do receive better tax advantages. 

8. The profits are all yours

One of the best advantages of being a sole trader is that you get to keep all of the profits that your business makes. 

There’s no need to share them with other shareholders or employees, as there are none. It’s just you, and you can reap the reward from all your hard work.

In addition, you might also be able to retain personal ownership of the assets that your business has – giving you extra capital to your name. 

9. More privacy

With limited companies, anyone can inspect their published accounts. It’s part of the public record for all to see. 

However, sole traders can be kept private. There’s no need to publicly publish any information, which means your finances are kept much more private. This also helps make sure your competitors have less information about your company, giving you an advantage. 

In addition, your personal information will also be kept private. 

10. No hiring problems 

Sole traders don’t have any employees, which means you don’t have to go through the whole process of hiring and managing employees. It also means you don’t have to negotiate payroll and other expenses that come with having employees. 

11. It’s easier to change your mind 

If you opt to be a sole trader and it comes to the point where it does not fit your needs, you can always change with much ease.

If you register as a sole trader and decide it’s not right for you, it’s easy to change to a limited company. If you want to change, all you have to do is go through the process of becoming a limited company. 

This is great for people who are testing out a new business, as being a sole trader gives you more flexibility to test the waters. As your company grows, or if you choose to expand and potentially even hire more people, you can register as a limited company later on down the line. 

It’s not as easy to change from a limited company into a sole trader. To do this, you would have to through a formal process of closing your company before you can register to be a sole trader. If you’re unsure, it’s better to start out as a sole trader first. 

What are the disadvantages of being a sole trader? 

There are many advantages of being a sole trader, but sadly it’s not for everyone. There are a couple of downsides that you may experience, particularly as you have full control of the company. 

This is a great benefit for running the company for how you want, but it also means you’re responsible for any failures or debts that you might acquire. There’s also no one else to rely on if you’re ill or unable to work. You have no employees that will take over, meaning that if you’re unable to work, you’re unable to earn. 

Some people will also view sole traders as too small to handle certain jobs, meaning that you might miss out on certain contracts. In addition, if you want to build a business and cash out, this will also be more difficult to do as a sole trader. 

How to set up as a sole trader

Setting up your business as a sole trader is simple and easy. 

It involves just three easy steps. 

  1. Tell the HMRC that you’re self-employed. This involves just filling out one simple form. 
  2. Choose your business name. If you want to stop others from trading under this name, you might be able to also register for a trademark. 
  3. Register for Self Assessment for your tax and make sure you file them annually. 

That’s it. Pretty simply, huh? 

Recommended Course:

Includes:

  • How to get organised for doing your own tax return
  • How to find your way around the HMRC website
  • How to complete your tax return
  • How to answer the HMRC questions that are hard to understand when you’re not an accountant
  • Plus much, much more!

What are the advantages of being a limited company?

Of course, some people will find that setting up as a limited company is a better option, even if you’re the sole director and shareholder (helping you retain some benefits of being a sole trader). Here are the main advantages of being a limited company in a little more detail…

1. Liability

As a sole trader you would be responsible personally for any debts that are incurred. In a worst case scenario this could result in you losing personal possessions including your home.

Limited companies are much more appealing in this respect since the company is responsible for its debts and not the people who run it.

Of course this does not give you free reign to run up huge debts as there are laws that help to prevent the limited liability aspect of companies from being abused. However, it does give you peace of mind that even if your venture fails, you will not be forced to lose your property or other possessions.

2. Tax and Income

As a sole trader you would need to pay income tax on the full profit you have earned in a financial year. This will be a simple calculation of income minus costs.

There are few options available to reduce the amount of tax you need to pay as a sole trader and you will pay tax at the same rate as everyone else who has a regular job as an employee.

A limited company on the other hand can pay its directors and shareholders a lower standard wage to provide the individual with a fixed wage. The rest if made up by paying a regular dividend, which is taxed at a much lower rate.

Usually this will mean you can pay less tax when running a limited company and you have greater control over how much tax you pay. However, you should also take in to account the corporation tax your business will need to pay.

Adding more weight to the limited company argument is the fact it is easier to claim other benefits such as a company car to further reduce your tax liabilities. For most people therefore a limited company will be more tax efficient than being a sole trader.

3. Perception & Opinion

In any competitive environment, the perception of your business by your customers and clients is key. The type of company you are running will strongly affect the perception you want to give.

For example, a local housing window cleaner may prefer to be seen as a sole trader as this can be much more friendly and personable and may even increase the trust levels of customers.

However a window cleaner who specializes in cleaning windows of large businesses may prefer the impression a limited company gives off of him being a successful and professional operation.

4. Shareholders & Investments

shareholings of a limited company

If you are looking to gain investments or a loan for your business venture then undoubtedly a limited company has the edge.

For one thing, investors and banks will always be more keen to lend to a proper business than a sole trader, but due to the issuing of shares in limited companies, its much easier to make investment a more attractive option (since investors will gain a share of the profits).

Another consideration is that a limited company is much easier to sell or transfer to a new owner at a later date as they can just take over the issued shares. This also makes it easier to leave your business to a loved one in a last will of testament.

What are the disadvantages of being a limited company? 

Ultimately, the disadvantages of being a limited company mostly orientate around the additional costs and regulations you’ll need to consider.

That means much will depend on how much you anticipate your earnings to be, how quickly you’ll grow, and how confident you are that you’ll be successful.

If you are only expecting modest earnings or slow growth, or you are not sure if your plans will work, being a limited company comes with much more negatives if things don’t quite work out.

It will cost you more and take up more of your time learning and complying with all your responsibilities.

That’s why most people start as a sole trader when deciding between sole trader or limited company. They tend to only transition to a limited company as their business becomes established and stabilised.

How to set up as a limited company

While more involved than becoming a sole trader, setting up as a limited company is still relatively straightforward.  

Here are the steps we recommend:

  1. Decide on a catchy name for your business.
  2. Choose a company formation agent to register your limited company. They will take all the legal steps necessary to register your company with Companies House.
  3. Create a company bank account and start following basic bookkeeping practices to keep everything in order (you will find accountancy software makes this job much easier).
  4. Register for Corporation Tax or hire an accountant who will do this for you.
  5. Ensure you stay on top of all your annual filing requirements.

Not that scary after all, huh? 

Recommended Course:

Includes:

  • VAT – What it is, how to register, how to file returns, and more
  • Corporation Tax – How to register, filing deadlines, and more
  • Self Assessment – Who needs to do one, completing a return, and more
  • Personal Tax – Who is elible, what the rates are, and more
  • Designed for entrepreneurs, business owners, self employed

Still not sure whether being a sole trader or limited company is right for you?

Don’t worry, it’s a big decision and you should make sure that you have looked at all the information before you act.

Ultimately it comes down to personal preference, and its important not to spend too much time debating the pros and cons and just get started in making your business a success.

There are advantages and disadvantages to both so just get a feel for which is likely to be best for you and get going.

Whichever route you decide on it is always reversible. While it’s easier to change from a sole trader to a limited company in the future, you can also do it the other way around too. That means there really is no wrong decision as such.

Looking for more tips on setting up your business? Check out our ideas and tips here.

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