Limited Company vs Sole Trader: Which is Right for You?
Go Limited Limited Company vs Sole Trader: Which is Right for You?
Regardless of industry, you have to decide which way you want to approach contracting. You have the choice to operate as a sole trader, as many freelancers do, or you can take things to the next level and set up a limited company.
At Go Limited, we're here to help you decide what's right for you. Below, we've taken a look at limited companies, sole traders and the main differences between the two.
What's a Limited Company?
As a contractor, you have the option to set up a limited company. This means creating a business that's a separate legal entity from you. Even though you're likely to be the sole director and shareholder, the business and you are considered as two separate things legally. This means the business can enter into contracts, own property and take on debts in its own name, and you aren't personally liable if anything goes wrong. Setting up a limited company also gives you limited liability, your personal finances and assets are protected.
To set up a limited company, you need to register with Companies House. You'll also need to take on director responsibilities and even if you're the only director, you must act in the business' best interests and file the required returns with HMRC. Contracting through a limited company also has the benefits of tax-efficient and enhanced credibility with clients. Once everything is set up, your income comes via salary, dividends, or a bit of both.
What's a Sole Trader?
Along with the limited company route, you have the option of being a sole trader. This is generally considered to be the simplest way to approach self-employment and contracting. Though you're still a contractor, being a sole trader is different to working through a limited company. When you're a sole trader, you and the business are legally the same entity - this means if the business can't pay its debts, you're personally responsible - and you keep all profits after tax.
Setting up as a sole trader is simple; you just have to register with HMRC as self-employed. Though you're not a director, you do have financial and tax obligations to be aware of. This includes completing an annual self-assessment tax return, paying National Insurance and keeping track of your income, expenses, invoices and receipts.
Sole Trader vs. Limited Company: Differences to Pay Attention To
When you're comparing being a sole trader versus a limited company contractor, you need to pay attention to the key differences between the two.
Legal Status - A sole trader and their business are legally the same, but a limited company is a separate legal entity. This means the business can own property, sign contracts and take on debts in its own name, without putting your assets at risk.
Liability - As a sole trader, you have personal liability. This means if the business owes money, you're personally responsible. A limited company offers limited liability, so your personal assets are protected if the business gets into trouble.
Tax - Sole traders pay income tax on their profits, and they also pay National Insurance. Limited companies pay corporation tax on their profits, and then directors are responsible for paying personal tax on salaries and dividends. There's slightly more to manage.
Admin - Running a sole trader business is straightforward. Though you'll need to keep basic records and complete a self-assessment tax return, that's where the admin ends. Limited companies have more admin, including filing annual accounts and a corporation tax return.
Costs - It tends to be cheaper to operate as a sole trader, with lower accounting and compliance costs. Setting up a limited company usually involves higher ongoing expenses, and this is largely due to many contractors having to hire a professional accountant.
Professionalism - Some clients view limited companies as more professional and established, making you more likely to secure a contract if you have a limited company. Sole trader status can be perceived as more informal.
Financing - Sole traders tend to rely on personal borrowing or savings to fund growth, which can be quite the undertaking. Limited companies can raise capital more easily by issuing shares or attracting investors, and using that money to drive growth.
The Benefits of Being a Sole Trader
There are benefits that come with being a sole trader, which is why it's a route many freelancers take. Here are some of the advantages of being a sole trader:
It's Simple and Quick to Get Started - You can register to be a sole trader online with HMRC, in a matter of minutes. You can then start trading immediately; there's no delays whilst you wait for everything to be up and running.
There's Low Running Costs - When you set up as a sole trader, you don't have to worry about Companies House fees. Plus, as everything is simple, you might not need a full-time accountant which reduces the running costs even more.
The Accounting Side of Things is Straightforward - As long as you keep accurate records and file a yearly self-assessment tax return, you don't need to worry too much about complex accounting.
You Have Full Control and Flexibility - When you're a sole trader, you're in control of everything. You make all business decisions, without having to consult other shareholders.
There's Lots of Privacy - As your business information isn't listed publicly, operating as a sole trader comes with a lot of privacy.
It's Easy to Close or Change Your Business - When you're a sole trader, you can stop trading at any time, or you can switch to a limited company structure relatively easily. This gives you the flexibility to change your business, ensuring it always aligns with your professional goals.
The Benefits of Being a Limited Company Contractor
Setting up a limited company is a popular approach to contracting, and that's largely due to the wide range of benefits it brings. Here are some of the advantages of being a limited company contractor:
Limited Liability Protection - When you're a limited company contractor, your personal assets are generally protected from business debts and claims. This means your personal property and savings aren't at risk if the business falls into debt.
Potential Tax Efficiency - Setting up a limited company could make you more tax-efficient. With the right mix of salary and dividends, you can reduce your overall tax bill compared to sole trader rates.
Professional Image - Trading as a limited company can make you look more professional. Many larger businesses prefer to work with a limited company, which makes you an option for a wider range of projects.
Ownership Flexibility - With a limited company, you can split shares between co-owners, business partners or family members. There's a lot of ownership flexibility, so you can find a setup that works for you.
Easier to Raise Capital - There's a lot that goes into building a business, and often you need an injection of capital. It's usually easier to raise capital as a limited company, as you look more professional and can more easily attract funding.
Business Continuity - As a limited company exists independently of you, it can continue trading if you retire or decide to sell it. This isn't the case if you're a sole trader, which involves the entire business being tied to you.
Deciding Which Contracting Route is Right for You
Deciding between being a sole trader or setting up a limited company isn't always easy. Though there are clear differences between the two, you might struggle to see which comes out on top. They both have their advantages, but there's likely to be one that suits you and your contracting slightly more than the other. When you're weighing up your options and trying to decide between being a sole trader versus a limited company contractor, be sure to consider:
Your Income level - If you expect modest profits, the simplicity of sole trader status might outweigh any tax savings from a limited company. But, higher earnings often make setting up a limited company more appealing.
Your Risk Exposure - If your work involves financial risk or potential legal claims, limited liability can be a big advantage, as it keeps your personal assets safe.
Your Clients' Preferences - Some businesses only hire limited company contractors due to compliance and risk management, and being a sole trader could mean you miss out.
Your Love of Admin - There's a lot more admin that comes with being a limited company contractor. Decide if you're comfortable with more paperwork and stricter compliance rules.
Your Growth Plans - If you're aiming to build and eventually sell your business, a limited company structure is generally better. But, if you're happy to keep things small, being a sole trader might be simpler.
At Go Limited, we know that both approaches have their benefits, and both allow you to contract, grow and build a successful career. But, for a lot of contractors, setting up a limited company is the obvious choice.
Frequently Asked Questions: Sole Trader vs Limited Company (UK)
Can you be a sole trader and then change to a limited company?
Yes — many business owners start as sole traders and later incorporate to become a limited company when their business grows, profits increase, or they need more credibility and protection. The process is straightforward and involves registering a company with Companies House and transferring your business assets/contracts.
How do I change from sole trader to a limited company (UK)?
You'll need to:
1. Form a limited company with Companies House.
2. Inform HMRC you're stopping as a sole trader.
3. Open a new business bank account in the company's name.
4. Transfer business assets, contracts, and VAT registration (if relevant) to the company.
5. It's often best to do this at the start of a new tax year and with accountant support.
Can I be a sole trader and a limited company at the same time?
Yes — you're allowed to run multiple businesses in different legal forms. However, you'll need to keep separate accounts and file separate tax returns (Self Assessment for your sole trader income and Corporation Tax + Company Accounts for the company).
What's the difference between a sole trader and a limited company?
1. Ownership: Sole trader = owned/controlled by one person. Limited company = a separate legal entity owned by shareholders.
2. Liability: Sole traders have unlimited personal liability. Limited company directors/shareholders have limited liability.
3. Tax: Sole traders pay Income Tax & NIC on profits. Limited companies pay Corporation Tax (currently 25%), and owners extract money via salary/dividends.
4. Admin: Limited companies have more reporting requirements (e.g. Companies House, statutory accounts).
Which is more tax efficient – sole trader or limited company?
Limited companies can be more tax efficient once profits exceed around £30,000–£40,000 per year due to lower Corporation Tax and ability to take dividends. For small profits, simple income, or side gigs, sole trader status can be cheaper and easier.
Can I run a limited company and a sole trader at the same time?
Yes, you can — for example if you have different business activities. Just keep clear accounting records and be aware of your separate tax/reporting obligations.
Should I register as a sole trader or limited company?
It depends on your priorities:
1. Sole Trader: Simpler, quick set-up, low admin.
2. Limited Company: More professional image, can be tax efficient, limits personal liability.
3. As a rule of thumb, if you expect growth, high profits, or want to protect your personal assets, consider a limited company.
Can you transfer VAT registration from sole trader to limited company?
Yes — you can apply to transfer your VAT number. HMRC will treat it as a "transfer of a going concern". You'll need to complete a VAT68 form.
Can you change from a limited company to a sole trader?
Yes — but it's more awkward. You'll need to close/dissolve your company, settle corporation tax and liabilities, and then register as a sole trader with HMRC.
Can I be a sole trader after making a limited company dormant?
Yes — you can stop trading through your company (make it dormant) and trade as a sole trader instead, as long as you inform HMRC and keep the two separate.
What size should a sole trader reach before forming a limited company?
Many switch when profits exceed ~£30–40k per year or when they take on higher-risk work, larger contracts, or staff. But there's no fixed rule — you can incorporate at any stage.
Is a limited company better for getting a mortgage than being a sole trader?
Mortgage lenders tend to look at your overall income, not your structure. However, limited company directors sometimes struggle to prove income if they keep salary/dividends low. Speak to a mortgage broker experienced with self-employed clients.
Can one person have both a limited company and also trade as a sole trader?
Yes — legally, you can. You just need to register both and keep the finances entirely separate.
Important:
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
