Business formats explained: Should you register as a sole trader or a limited company?

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We've written an expanded version of this popular article. Stay here for a quick read or visit our guide - UK Company Structures and Business Formats - for more in-depth information.

Sole trader or limited company is the first choice most start-up businesses face. If you are starting a business alone, the structure you register your company under will essentially depend on how much legal and financial responsibility you want to take for the business.

The pros and cons of sole trader vs limited company

What is a sole trader?

A sole trader means you maintain complete control over the business, keeping all the profits after tax. The law will not distinguish between yourself and your business, meaning if the business runs into trouble, you will bear all the legal and financial responsibility. Setting up as a sole trader is the easiest option if you are the only owner of the business and HMRC says 60% of UK businesses use this format.

What are the pros of being a sole trader vs being a limited company?

Sole trader Limited company
Simplest form of business structure You are separate from your business and have limited liability for losses
Least admin of all structures Reduced tax liability in certain circumstances (when taking dividends)
More privacy More effective for tax above certain earnings
Keep all the profit
You retain full control of your business

What are the cons of being a sole trader vs being a limited company?

Sole trader Limited company
You are the business; you’re liable for any losses Subject to more public scrutiny / less privacy
Some businesses prefer to work with limited companies Potential shareholders to share the profit with
Registering as a sole trader is the easiest option Less autonomy / control of your business
You bear all legal and financial responsibility More complicated structure and admin

What is a limited company?

A limited company is a separate legal entity to its directors, limiting how much the owner is liable if the business runs into trouble.

Setting up as a limited company could be more tax-efficient. You'll pay Corporation Tax rather than Income Tax. The profits belong to the company, rather than you, so you are paid as an employee. If you chose to become a shareholder, you can take dividends as well.

Setting up a limited company is more costly and requires more administration than registering as a sole trader, but in the long term, it's less of a risk.

  • A limited company is a separate legal entity to its directors

  • You are paid as an employee and can choose to take dividends

  • Setting up is costlier and more time-consuming but less of a risk

Things to consider

Registering a company can be hard work, especially if you're doing it for the first time, so you might want to consider engaging the services or advice of someone with experience. If you're unsure as to what format to choose, speak to a solicitor or accountant who should be able to help, while a formation agent will help speed up your registration. Alternatively, try an online registration company which will be cheaper.

  • If you're confused, speak to a solicitor or accountant

  • A formation agent will speed up the process

  • An online registration company will be cheaper

ABOUT THE AUTHOR: Suzy Jackson
Suzy Jackson
Suzy is a small business supporter and strategiser, and a self-employed qualified ADHD Works coach. A former business journalist, Suzy is passionate about independent businesses, and the people who own and operate them. She's built teams, created and developed new products, and helped hundreds of entrepreneurs to bring their ideas to reality.

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