Limited Company or Sole Trader?

Limited Company or Sole Trader

Should you operate as a limited company or sole trader? When choosing which is the most efficient way to trade, there are many factors you need to take into account.

Tax Considerations

Forming a limited company was the most obvious answer a few years ago. Shareholders were able to draw dividends up to their higher rate band of £42k, without incurring any personal tax. Now, there is a tax free amount of £2k that can be drawn. After which directors are liable for 7.5% tax on the dividend, which increases to 32.5% if you exceed the higher rate band. This change in tax now needs to be taken into account when considering setting up a limited company.

I have calculated that you should stay as a sole trader if your expected taxable profit is £20,000 or below. In this situation you are better off by approximately £300 p.a. from a tax perspective, than if you trade as a limited company. This is without taking into account the additional admin costs.

You also have to be mindful of the non-tax issues when deciding whether to operate as a limited company or sole trader.

Non-Tax Considerations


  • You have limited liability protection so if for any reason you need to close the company then your are personally protected from any creditors
  • Reputation – it shows your customers that you are a serious business
  • You can bring in shareholders to invest in the company
  • Tax planning opportunities are available in certain circumstances, such as the use of dividends, fragmentation of shares, company pension schemes for directors


  • You need to be aware of your responsibilities as a director
  • Your financial accounts will be on public record at companies house
  • You need to file annual accounts and a confirmation statement, which is more costly than preparing sole trader accounts
  • You can separate various business operations into separate companies, which enables you to sell off or close certain operations that are not performing too well
  • You can run company cars as a sole trader without incurring any tax on the benefit whereas the tax can be excessive if a company car is run through a limited company
  • A PAYE scheme is usually required. It is not possible to take money out of the company on an ad-hoc basis as can happen in a partnership
  • It is not easy to end a company as it has a separate legal entity
  • There are likely to be taxable “benefits in kind” giving rise to tax liabilities on the directors e.g. company cars, and fuel etc. Please see example under Taxation Aspects below.  This does not apply to partners in a partnership. A director/shareholder can loan money to the company but cannot borrow from it.  Loans to directors are prohibited (i.e. an overdrawn loan (capital) account is illegal) and can also have serious taxation consequences.

As you can appreciate there are many factors to take into account when considering the business structure to take when you are running your own business.

Personally, if the business starts off on a small scale I would trade as a sole trader and once the business starts to grow then convert to a limited company. However, for the sake of a 10 minute conversation I would always consult with your accountant and discuss with them your long term plans.

If you are unsure whether to operate as a limited company or sole trader, contact Lee via the details below.

Written by Lee Manning
0203 146 1604

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