Sole Trader Vs Limited Company: Which Is Right For Me?

Deciding whether to run your business as a sole trader or limited company? It’s an important choice to make, but with so much conflicting advice out there, how do you know which is best? We spoke to Ade Holder, sole trader and owner of marketing consultancy 427 Marketing, and Janan Leo who runs limited company Cocorose London with her partner, to reveal the pros and cons of each, helping you work out which is right for you. 

The advantages of being a sole trader

Setting up and running your business is simple

Ade was impressed by how easy it was to set up as a sole trader. “When I decided to start my own business, I just talked to friends, explained what I did and have grown by referrals since. All you need to do as a sole trader is complete one simple tax return. There’s no other paperwork or directors to worry about, so you can focus all your attention on running your business.”

You keep all the profits

As the sole owner of your business, you keep all the money you make (after paying tax). And you have total control over how it’s spent, too. As Ade explains, “I can do what I want with my money – if I need to take it out or move it between accounts, there’s no issue”.

You get more privacy

Unlike limited companies who need to make a certain amount of information public when they register with Companies House, sole traders can keep their data and finances private.


The disadvantages of being a sole trader

You’re personally liable

If you choose to run things as a sole trader, you and your business will be seen legally as one entity. This means you’ll have unlimited personal liability if your business runs up any debts. Worst case scenario, your home, personal savings and other assets could be at risk if things go wrong.

But like Ade, you can help protect yourself and your business with public liability insurance.

It’s harder to raise capital

Planning to expand? As a sole trader, you might find it harder to raise funds to do this, as your business structure can be seen as risky by traditional lenders, like banks. Ade explains, “if you’re a sole trader and you want to grow your business, there’ll probably come a point when you need to think about changing to a limited company.”

You potentially have less kudos 

As Janan has found, limited companies can have a certain prestige over sole traders. “Its good for me to be a limited company, from a perception point of view. It was always my plan to grow and when you go to trade shows and meet distributers, you need them to take you seriously. I didn’t want people to think of my business as a hobby, so it was important to me that we presented ourselves as a limited company – for our credibility and reputation. Ade agrees, “there’s a slight kudos that comes with a limited name – and, I suppose, a trust aspect too.”


The advantages of being a limited company

There’s less personal responsibility

This was an important factor when Janan decided to take the leap and make her business a limited company. “Being a sole trader was fine when it was just me. But when my partner Gareth came on board, we wanted to have equal ownership and share for both of us, so we decided to become a limited company and be directors instead.”

You’re likely to pay less tax

One of the biggest pros of running your business as a limited company, rather than a sole trader, is you’ll probably pay less tax. Limited company profits are subject to corporation tax, which is set at 19% for the 2018/19 tax year. This is lower than the personal tax rate that you’d pay as a sole trader, which can reach 45%

You have access to more capital

Having yourself and your business as two separate entities can make it a bit easier for your company to secure finance. This might be particularly useful if you want to expand, like Janan did. “If you want investment, you need to be able to issue shares. So, if you want to grow your business, being a limited company is the way to go.”

The disadvantages of being a limited company

You have less control

If there was a dispute between yourself and the other directors or shareholders, it might be harder to deal with than if you were the sole owner of the business with the final say. Selling shares to raise cash ultimately also dilutes how much power you have, as you open the door for investors to have potential input on how the business is run.

H3: There’s more red tape

Janan knows this too well. “One drawback of being a limited company is definitely the paperwork! You need to keep accounts and file everything. If you’re not from that background, it can be challenging.”

And making changes can be complicated in a limited company, too. Want a new business name? It’s much easier to change it if you’re a sole trader. As Ade explains, “From HMRC’s perspective, when you’re a sole trader, you and your business are one, so your name doesn’t really matter. Technically, you could change it every week if you wanted.” Not so for a limited company – you’ll need a special resolution or permission given in the business’ articles of association.

H3: It can be more expensive

Limited companies can be pricier to start and maintain than sole traders. First you need to pay a fee to form the limited company. Then you might need to hire an accountant to keep on top of all the financial records you have to keep and submit. Depending on your turnover, it might make more financial sense to run things as a sole trader.

The verdict?

Whether you should operate as a sole trader or limited company comes down to the needs of you and your business. For Ade, it’s much simpler to be a sole trader. “I have an office in my garden and no stock or products to worry about, so it’s great. But I see that it could be different for other businesses.” Janan agrees – “if you’re a small lifestyle business and aren’t bothered about going global, it might be nice to remain a sole trader. But because of my growth plans, eventually it was time for my business and brand to become a limited company.” 

However you choose to run your brand, find out how public liability insurance can help protect you and your business.

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