Running a business is full of big decisions – and one of the most important is whether to operate as a sole trader vs ltd company. There are distinct advantages and challenges to both, depending on the size and nature of your business and financial goals. In this blog, we’ll explore the key differences and help you answer the question.
Sole trader vs Ltd?
Deciding whether to operate as a sole trader or a limited company (Ltd.) depends on how you run your business and your approach to risk, tax and control.
As a sole trader, you have full ownership and control of your business. This structure is simpler to set up and manage, with fewer administrative tasks, which makes it ideal for freelancers, contractors and small businesses. You can register as a sole trader with HMRC, and your business’s profits will be taxed as your personal income. However, as a sole trader, you are personally liable for any debts or losses your business incurs. This means your personal assets, including your home or savings, could be at risk if your business faces financial trouble.
On the other hand, setting up a limited company creates a separate legal entity for your business. This means your personal assets are protected, as your liability is limited to your company shares. A limited company can be more tax-efficient for businesses with higher profits, as corporate tax rates are generally lower than personal income tax rates. Operating as a Ltd. also lends credibility to your business, making it easier to attract investors and clients (some larger organisations won’t deal with sole traders). However, it requires more admin, accounting, and paperwork, including filing annual accounts with Companies House. This means the outside world (including competitors, suppliers, customers and staff) will be able to view the business’ balance sheet and see important information like bank balances and retained profits.
If you choose to go down the limited company route, you will need to form a limited company (either yourself, by using an online agent or paying your accountant to do it), appoint directors and issue shares in the company. You will then need to register the company with HMRC.
So, a sole trader may be the best option if you prefer simplicity and full control, while a limited company gives you limited liability, tax efficiency, and potential growth.
Can I use my Ltd company name as a sole trader?
No, if you have registered a limited company, you cannot operate under the same name as a sole trader. Your limited company is a separate legal entity, and the company name is protected by law once registered with Companies House. If you decide to operate as a sole trader, you can use your name or register a different business name, but it cannot be the same as your limited company name.
If you plan to switch from a sole trader to a limited company or vice versa, you must ensure your new business name complies with all legal regulations and is not already registered by another company or trademarked. This prevents potential legal disputes or confusion with existing businesses.
Can I run a Ltd company and be self-employed?
Yes, it is possible to run a limited company and still be self-employed. In fact, many business owners choose to do both to benefit from the flexibility of each structure. You can act as a director and shareholder of your limited company while maintaining other business activities as a sole trader or freelancer. However, it’s important to keep the finances of your limited company and self-employed ventures separate. This means separate bank accounts, accounting records and tax filings for each.
As a limited company director, you will need to pay yourself a salary through the company’s payroll and ensure that your company fulfils its tax obligations, including corporation tax and VAT (if applicable). As a sole trader, you will also need to file a self-assessment tax return for any personal business income earned outside of the limited company.
Running a limited company and working as a sole trader can offer tax advantages, depending on your income and profits. However, this dual approach comes with increased admin tasks and compliance requirements, so staying organised or seeking professional advice from a qualified accountant is essential.
Conclusion
Whether you should operate as a sole trader or a limited company depends on the size and complexity of your business, your appetite for risk and how you want to manage your finances. A sole trader structure offers simplicity and full control but comes with personal liability, while a limited company offers limited liability and potential tax advantages but requires more administration. For those who want the benefits of both, it’s possible to run a limited company while remaining self-employed, although it requires careful financial management.
At 360, Chartered Accountants, we can help you make the right choice for your business start-up, including which legal entity to choose and how to extract profits in a tax efficient manner.
We provide clear and timely tax planning advice to individuals and businesses. For more information, call us at 01482 427360 or fill out an enquiry form online.
