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.

Sole traderLimited CompanyPros
  • Simplest form of business structure

  • Least admin of all structures

  • More privacy

  • Keep all the profit

  • You retain full control of your business

  • You are separate to the business and have limited liability for losses

  • Reduced tax liability in certain circumstances (when taking dividends)

  • More effective for tax above certain earnings

Cons
  • You are the business; you’re liable for any losses

  • Some businesses prefer to work with limited companies

  • Subject to more public scrutiny / less privacy

  • Potential shareholders to share the profit with

  • Less autonomy / control of your business

  • More complicated structure and admin

  • Registering as a sole trader is the easiest option

  • You keep all the profits after tax

  • You bear all legal and financial responsibility

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

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