Sole Trader vs Limited Company – Which Is Best For You?

This is a question we field fairly often at Active Accounts, as such, we thought we’d pop down some of what we felt were the more pertinent points for self-employed professionals to consider. If we mention anything you would like to discuss further, please do email us at or use the form on our homepage and we’ll gladly continue the discussion!

The question we receive here at Active Accounts typically goes along the lines of:

“I’m not sure whether to incorporate my business or not… it sounds quite good from what I’ve heard – I guess I should probably do it?”

The answer? It depends.

Whilst incorporating your business as a limited company sounds impressive (and for some that is in fact a strong reason to do so), it is not a black and white situation whereby incorporating your business is always the superior option.

We’ve put together some salient points below to give you a flavour of whether or not it might be for you.

Benefits of incorporating your business as a limited company:

  • Arguably the most important aspect of incorporating as a limited company is that the business is a separate legal entity. This is important from a legal perspective; essentially, if you get into trouble – say the business goes bankrupt and the company has a great deal of debt or if someone takes legal action against you – only the company is liable to this action (so your personal assets and money cannot be seized).
  • As mentioned earlier, an incorporated company, whilst not guaranteeing reliability, can also give the impression of a soundly based organisation and may appear more credible. This is good if, for example, you wish to raise capital or get external investment for your business.
  • Incorporating as a limited company can have benefits from a taxation perspective; a savvy approach may see you utilise your personal allowance with a basic salary and subsequently pay yourself dividends which are taxed at a lower rate of income tax.

Benefits of being a sole trader:

  • You can withdraw cash from the business without a tax impact. As a director of a limited company, you must declare your withdrawals as earnings, or a loan, which will require declaration on your income tax return (and will therefore be subject to income tax).
  • You can claim tax allowances on portions of expenses that are partially business related i.e. mobile phone bills, broadband etc. A great point for many self-employed folk – if you work from home you can claim back a portion of rent, utilities, council tax etc. (with a limited company you can only claim expenses that are wholly and exclusively for the purposes of trade).
  • There is no legal requirement to prepare financial statements, annual returns etc. That said, we recommend preparing and maintaining management accounts to some level as it is best practice with regards to financial management!
  • Continuing as a sole trader is less costly in terms of admin – a limited company requires annual fees, as does the preparation of financial statements etc. if you solicit the services of an accountant.

The above is by no means exhaustive but we feel it draws out some of the more pertinent arguments for and against incorporating as a limited company.

Got a question? Contact us via the form on our home page or email and we’ll be in touch.

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