Sakura Business Solutions - Sole trader / self employment vs limited company
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Sole trader / self employment vs limited company

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When starting out in business, there are typically two routes taken by budding entrepreneurs e.g. via a Self-employment or Sole trader status or using a limited company structure.

Being self-employed or operating as a sole trader offers a great deal of freedom, as you can avoid the extra administrative burden and costs of setting up a limited company, but on the other hand, there are no legal protections if something goes wrong, i.e. it is all on your own shoulders.

Where the business remains a relatively small undertaking with no need to take on staff and with a limited income, operating as a sole trader is usually preferable to a limited company.

Ultimately deciding on the right structure doesn’t only depend on the size of your current business activities, but also on any longer-term plans you may have for the development of the business including:

  • Potential for new business partners.
  • The type of clients or sector that you are operating in.
  • Any exit (or retirement) plans your may have for the business.

Self employment unlimited freedom + unlimited responsibility

Generally where the business remains a relatively small undertaking with no need to take on staff and with a limited income, operating as a sole trader is usually preferable to a limited company.

Advantages

More freedom, less admin: It’s simpler in terms of paperwork as there are less regulations and admin requirements in comparison with operating via a limited company.

Saves money: It is a less expensive option for a startup in terms of professional fees.

Less deadlines: There are less deadlines, legal and record-keeping responsibilities to worry about.

More Flexibility: Being self-employed can be a great way to “test” a business idea and prove that the business model involved works!

Better Cashflow: Income tax is paid to HMRC in tranches after the end of the tax year.

Disadvantages

Clients: There may be a limit to how big a client you can attract as self-employed.

Income Tax: You have less flexibility on managing your total tax liability in years of good trading.

Limited company unlimited opportunity + limited responsibility

Advantages

Unlimited opportunities: Many larger businesses prefer to work with limited companies compared to self-employed businesses.

Limited Liability: If things don’t go quite according to plan and your business fails, your financial liability is usually limited to your investment in the company itself.

More pay: Another key advantage is the opportunity to take home more earnings through the use of salary and dividends, which is not possible otherwise.

Easier to borrow money or obtain funding: Banks, investors and other funders are unlikely to provide funding to a business that is not operating as a limited company.

Disadvantages

Fees: With the additional legal and tax compliance associated with a limited company, your accountancy fees will be higher.

Admin: You need to ensure that your personal and business transactions are kept entirely separate from each other to avoid confusion.