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Sole Trader VS Limited Company: The Best Option for Your Small Business

by | Jun 14, 2017

Sole Trader VS Limited Company: The Best Option for Your Small Business

A major decision that you must make regarding your business is the form of legal entity it will take. To a large degree, this decision may be dictated by the way you have organised your operations and whether you intend to work on your own or in conjunction with others. Ultimately, the best option depends on what you want from your business.


The form of entity you choose can have a significant impact on the way you are protected under the law and the way you are affected by taxation rules and regulations. There are four basic forms of business organisations. This blog post will focus on sole traders (also known as a sole proprietorship) and limited companies and the pros and cons associated with each.


sole trader vs limited company


Sole Trader

A sole trader typically describes any business that is owned and controlled by one person. The profit or loss of a sole proprietorship is combined with the other income of an individual for income tax purposes.



  • Quick and easy to set up.
  • Full control of the business can be maintained and ran without interference from others.
  • All profits can be retained.
  • Information regarding sole traders are kept private, unlike limited companies which must make their accounts public upon registration with Companies House (however, this is only short-set accounts and therefore should not be a determining factor in becoming a limited company).
  • Currently, there is no legal requirement that sole traders need to prepare accounts for tax purposes. However, this is due to change from April 2018 with the introduction of the government initiative Making Tax Digital – check out What Making Tax Digital Means for Individuals and Businesses for everything you need to know.



  • Sole traders do not have a separate legal entity and as a result have unlimited liability. Therefore, the owner is personally liable for any and all debts generated by the firm.  This means that the owner can risk their home, assets and personal savings from within the business and out with the business, if they are required to pay a significant debt.
  • Banks are less likely to lend to a sole trader than a limited company. This reduces sole trader expansion.


Limited Company

A limited company is a separate legal entity that exists under the authority granted by statute. A limited company has substantially all the legal rights of an individual and is responsible for its own debts.



  • Banks often perceive limited companies as safer and more reliable. Therefore, finance is more readily available to limited companies in comparison to sole traders. To learn about how SRK can support you find, compare and select the right lender check out SRK Funding.
  • Likely to pay less personal tax than as a sole trader. Typically, we advise that if your business generates £25,000-£30,000 turnover you should move to a limited company for the tax savings to be worth it, alongside the increased accounting costs. To learn more read Directors Salary and Dividend 2017/18.
  • Limited companies offer reduced responsibility for your business debt. This means the owners or shareholders of a limited company are protected from the liabilities of the business. However, when a limited company is small, creditors often require personal guarantees of the principal owners before extending credit.
  • Generally, this prevents the owner from being sued. For this reason, it is recommended to become a limited company when employing staff.
  • A wider range of expenses can be claimed. Anything classed as a genuine business cost can be claimed back on expenses. Read What Expenses Can I Claim Through a Limited Company.
  • Benefit from the Flat Rate VAT Scheme. Learn more at Flat Rate VAT – The New Percentage for Limited Cost Businesses.



  • More paperwork and extra range of legal duties
  • Annual accounts must be prepared under the provisions of the Companies Act and in accordance with accounting standards. Changes to how these will be reported for limited companies will change from April 2019 with the introduction of the government initiative Making Tax Digital – check out What Making Tax Digital Means for Individuals and Businesses for everything you need to know.


Sole Trader vs Limited Company

The key differences between sole traders and limited companies are:

sole trader vs limited company

If you are considering starting a business or looking to change the legal entity of your business, then register for SRK’s Structure Your Business to Success webinar, designed to help you with the financial, tax and accounting considerations of starting a new business

SRK offers support and specialised packages to both sole traders and limited companies. To book a free consultation with SRK to discuss the best option for your business, please book in below. 




Thank you for reading! Please leave any feedback and comments below. 


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