Limited company or sole trader – compare business structures

limited or self employed

Going self-employed as a sole trader, or setting up your own limited company are the two most popular ways to start up a new business. However, there are significant differences between these two types of business structure which you can compare here.

 Limited CompanySole Trader
Legal StatusA limited company is a separate legal entity from its shareholders and directors.The business and its owner are treated as the same single entity.
TaxationThe company pays Corporation Tax on its profits. Employees (including directors) pay income tax and Employees' NICs on any salary. The company pays Employers' NICs on salaries. Individuals pay dividend tax on any distributions received via the Self-Assessment process.The business and its owner are treated as one entity via the annual Self-Assessment process. The self-employed pay Class 2 and Class 4 NICs, as well as income tax.
Starting UpYou have to incorporate your company, and register the company for various taxes (Corporation Tax, VAT, and as an employer). You will typically hire an accountant to undertake the start-up tasks. Very simple - you can start trading instantly. Just let HMRC know that you've started a business.
LiabilityAs the name suggests, the liability of directors is limited should anything go wrong. If the company becomes insolvent, your personally liability is limited unless you have made a personal guarantee to secure funds.If something goes wrong with the business, its owners are liable. If you go insolvent, you are liable to settle any outstanding debts.
Tax PlanningDirectors can decide when to distribute dividends, and may defer to a future tax year to minimise tax. You may share the business with your spouse to reduce the tax burden.You cannot defer profits. Tax planning options are minimal.
PaperworkMore paperwork than the sole trader route. An accountant will undertake most administrative tasks, although the directors are ultimately responsible for accurate and timely filing. Directors also have a number of general responsibilities they must take on.Very little regular paperwork. You must maintain accurate records.
PrivacyThe details of the company and its directors can be searched on the Companies House database, although you can use a service address instead of your residential address to protect your own privacy.Your details are not displayed or searchable by the public.
Raising MoneyBanks and other financial institutions are more likely to lend to incorporated entities.Harder to raise funds as a sole trader.
Tax EfficiencyIn general, the tax burden is lower for a company director, as no NICs are payable on dividends. You can also offset a number of expenses against the company's tax bill.Overall tax burden is higher compared to the limited company route, as tax and NICs are payable on your entire profits.
PensionsYou can set up an executive pension, which may be more generous than personal schemes. Contributions are paid by the company, and offset against the company's Corporation Tax bill.You can only invest in a personal pension, although tax relief is available.
InvestorsIt is more attractive to would-be investors if you are incorporated - you can offer shares in the business.You cannot offer shares in your business. Instead, you could set up a partnership.
Succession PlanningWhen you die, the company remains - as it is a separate legal entity. When you die, your business will no longer exist.
ImageHaving a limited company may provide its owners with a more professional image. Most small businesses operate as sole traders, but in certain industries you may benefit by incorporating.
Providing personal servicesIf you are a contractor or consultant, you will typically need to incorporate, as most clients will only work on a company to company basis.Most clients will not work with professional contractors if they are self-employed, as they do not want to deal with potential employment claims.
Business nameYour company name is protected, and no other company may use a 'similar' name, according to Companies House rules.Although trademarks are protected regardless of business structure, other businesses may have very similar names to your chosen trading name.
AccountsYou must have your company accounts prepared and submitted to Companies House and HMRC each year. Your accountant will do this on your behalf.You are not required by law to prepare or submit accounts, however they will be useful - especially when preparing your annual self-assessment return.

Protection Essentials for Limited Company Owners

Relative Life Cover - Save up to 50% on life insurance
The premiums are paid by your own limited company, resulting in a large tax saving. Read our guide here.

Private Medical Insurance - Essential health cover
Avoid NHS queues. Private treatment at a time that suits you and your family. Read our guide here.

Income Protection - What if You're Unable to Work?
Monthly income to cover expenses until you are well enough to return to your business. Read our guide here.

Business Insurance for your Limited Company
Specialist policies to cover Professional Indemnity, Liability and IR35 Protection. Visit Qdos.