Limited Company vs. Sole Trader - Which is Best For Your Business?

December 1, 2020

If you’re self-employed in the UK then you’ll need to set up your business either as a sole trader or a limited company. How do you choose which is best for you? In this guide, we'll be taking a look at everything from filing taxes to getting paid and naming your company so you can choose the best option for your self-employed business!

No matter which option you choose, hiring an accountant is a top way to keep your books organised, so you can focus on what you do best. Submit a free request to get bids from professional accountants on Bidvine.

How do You Know if You’re Self-Employed?

Not sure if you’re self-employed? Here’s a quick check-list:

  • You run a business for yourself
  • You sell goods or services to earn a profit
  • You are responsible for the success of the business
  • You have multiple customers at any given time
  • If you need additional help to complete work you hire someone for the business

Did you say yes to one or several of the options above? Then it is likely you are self-employed.

For a complete self-employment check-list visit this page

What if You Work as an Employee For a Company?

If you chose one of the options above and you also work as an employee you are likely both employed and self-employed.

Even though part of your income is employed, if you are earning a profit from the goods or services you sell, the other part of your income is still considered self-employed. This means you’ll still need to decide whether to operate your self-employed business as a sole trader or limited company.


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What is a Sole Trader?

A sole trader is someone who runs a self-employed business and earns more than £1,000 from self-employment during the tax year. You will also need to register as self-employed if you plan to claim Tax-Free Childcare. 

Filing Income Tax Through Self-Assessment as a Sole Trader

When you file your income tax return for your self-employed business profits with HMRC, you’ll need to register as self-employed and pay tax through Self-Assessment

As a sole trader, there are also specific business records you will need to keep for filing your return. You can learn more about these here

Self-Employed National Insurance For Sole Traders

As a sole trader, you’ll also need to obtain Class 2 and Class 4 National Insurance. You’ll need to pay Class 2 if you have profits that are £6,475 or more in a tax year. Then you’ll also need to pay Class 4 if your self-employed business profits are £9,501 or more in a tax year. 

To learn more about Self-Employed National Insurance Rates visit this page.

Self Employed Professional

What is a Limited Company?

As an alternative to setting up your business as a sole trader, you can also set up as a limited company

There are two types of limited companies in the UK. Here’s a quick breakdown of how they compare:

Limited By Shares

Limited By Guarantee

  •  Makes a profit
  • Is not-for-profit
  • Business is legally separate from the people who operate it
  • Business is legally separate from the people who operate it 
  • Keeps finances separate from personal income
  • Keeps finances separate from personal income
  • Keeps its profits after taxes are paid
  • Invests the profits which are earned into the business
  • Has shares and shareholders in the business
  • Has guarantors and a ‘guaranteed amount’

In both cases, a limited company will be separate from the people who run it and also keep business finances separate from personal income.

If you run a limited company you’ll also need to keep specific business records. These are outlined here.

Interested in learning more about limited companies? Read more here.

Register your company for Free! Through our partner Tide, you can also register your company, open a business account and get £80 in perks. Learn more.

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Should I Set up Business as a Sole Trader or Limited Company?

Here’s a quick chart to help you decide whether setting up your business as a sole trader or limited company is best for you.

Sole Trader
Limited Company
Starting Up

Start offering your goods or services as soon as your business is up and running. Keep in mind you will need to register with HMRC for Self-Assessment as soon as you are trading. You can learn more about this here.
You’ll need to pay an application fee and register with the Companies House before you begin trading. This can be done by paper or online.
Filing Taxes

Self-employed business finances and personal income are linked. You’ll file them together for taxes with Self-Assessment.

Business income and personal income are separate. You’ll file taxes for your business income separately from your personal income.

The financial details of your business stay private unless you choose to share them.

Limited company’s financial records are publicly available. You can view them here.
Liability For Debts

You are personally liable for any debts your business assumes.

Your business is liable for any debts. Your personal assets are protected, but you may lose any investments in the business.
Getting Paid
To pay yourself as a sole trader you’ll simply transfer your earnings to your personal account. Keep in mind that you’ll still need to pay taxes on these earnings when you file your tax return.

To pay yourself as a limited company you’ll need to pay taxes first when you pay:

  • a salary (earnings paid to you or an employee)
  • expenses (such as for materials)
  • dividends (to shareholders)
Naming Your Business

You cannot include Limited or Ltd. in the company name

The name of your business will usually end in Limited or Ltd. 

Whether you choose to run your self-employed business as a sole trader or as a limited company hiring an accountant is a top way to ensure you keep your books organised and tax returns are filed correctly and efficiently.

Register your company for Free! Through our partner Tide, you can also register your company, open a business account and get £80 in perks. Learn more.

Looking for additional resources from your community of local professionals? You can also find expert web designers, business consultants, headshot photographers, and career coaches on Bidvine who can help you set your business up for success.

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