It’s a brand new year and might even be the one that you’ve decided to start your own business. 

If so, you’ll quickly run into a dilemma for most new business owners: what business structure should you choose: sole trader or limited liability company?

Both have their advantages and disadvantages – here’s what you need to know before choosing. 


What’s the difference between being a sole trader and company?

The main type of business in the UK private sector are sole traders, sometimes known as sole proprietors. In 2022, there were 3.1 million sole proprietorships in the country – 56% of all businesses. 

If you’re a sole trader, you run your own business as an individual and are self-employed. 

You can keep all your business’s profits after you’ve paid tax on them, and you’re personally responsible for any losses the business incurs. 

You need to set up as a sole trader by telling HMRC if any of the following apply:

  • you earn more than £1,000 from self-employment between 6 April and the following 5 April
  • you need to prove you’re self-employed, for example to claim Tax-Free Childcare
  • you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits.

The second most common type of business are companies, numbering 2.1m in 2022 (37% of all businesses). 

Companies are legally separate from the owner; they are a totally different entity. That means that, beyond the money you personally invested, you’re not liable for the debts of your company.

There’s no conditions under which you must set up a company – you could set one up today. You don’t even need to have employees, while sole traders can have employees, contrary to popular belief. 


Sole traders: advantages and disadvantages

Running a business as a sole trader is a relatively simple way to set up and run a business. Yes, you’ll have a number of responsibilities (keeping business and expenses records, sending a self-assessment tax return, and paying income tax and National Insurance on your profits), but these should all be manageable for you. If not, we have bookkeeping and accounting services available to help free up your time.

However, your profits will be taxed via income, which means you’ll probably have to cough up more in tax than the director of a limited company – especially if you’re doing particularly well. 

Moreover, as we said earlier, as a sole trader, you’re personally liable for all debts your business owes to its creditors. Even your home might be on the line if things go wrong.


Limited company: pros and cons

If you own a limited liability company, your personal assets, beyond what you invested in the business, will be safe. Again, you and your company will be considered as completely separate legal entities.

Limited companies also offer an opportunity to enjoy a more lucrative tax treatment. First, your profits will be taxed at a maximum of 25% from April 2023, depending on your exact turnover. That’s opposed to the 20%, 40% and 45% income tax brackets sole traders pay on portions of their profits. 

For your take-home pay, you can elect to pay yourself a low salary and top it up with dividends, which are taxed less harshly than regular income.

However, running a limited company comes with extra responsibilities – more so than sole traders. But, again, a good accountant will be able to help you manage some of your obligations with a strong company secretarial service

If you’re still not sure about which business structure would suit you and your business best, don’t hesitate to get in touch with us