Sole trader vs ltd company? Pros and cons in 2024

Last updated on 19 December 2023

One of the most commonly asked questions in business is whether someone is better off running their business as a sole trader vs through a ltd company.

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This article was contributed by Chris Thurgood, Head of Growth at Anna Money.

It’s a question that can come up at any time in a business’ lifecycle – you might be considering it right at the start of the business or you might be a sole trader who is thinking about “incorporating” to ltd company after many years of successfully running their business.

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Note: This article was written based on the tax rules currently in place in the UK. Upcoming events, such as Finance Acts, could change the situations described below. Because of that, nothing in this article should be considered advice. If you have any doubts or questions about limited companies, always speak to an accountant – or one of ANNA’s tax advisers. 

Limited company vs sole trader

This comprehensive article will look at the advantages and disadvantages of running a business through a ltd company. We’ll also take a look at the differences between a trading business and a property business, as these two types of business often require specific questions when it comes to limited companies and incorporation. 

To properly understand the advantages and disadvantages of a ltd company structure we first need to understand what a sole trader is and how a sole trader is taxed – so that we have something to compare it to!

What is a sole trader?

A sole trader is a self-employed person who runs a business in their individual capacity. The business doesn’t take on a separate legal identity – unlike a limited company – and so it’s closely linked with someone’s financial affairs.

There’s no need to formally register a sole trader business and the administration of a sole trade is generally simpler than running a business through a limited company (note: a property portfolio held in an individual’s personal name will be treated similarly to the sole trader business model, but the profits will be calculated using the property business tax rules, not income tax rules).

How is a sole trader taxed?

A sole trader is taxed on their taxable profit. They’ll pay Income Tax and Class 4 National Insurance Contributions (NICs). The rates of Income Tax and Class 4 payable vary depending on the level of profits made and change often – so it is always worth checking the latest rates on HMRC’s website. A sole trader will also pay Class 2 National Insurance Contributions.

Be aware that sole traders are taxed on all of the profit of their trade – regardless of how much they use for their own personal use. If the profit is £100,000 after allowable business expenses – the sole trader will be taxed on £100,000.

Key advantages of being a sole trader

  • It’s easier to set up as a sole trader and there’s normally less administration. This is an advantage in itself, but it also has the added bonus of saving professional costs over the lifetime of the business. 
  • A sole trader doesn’t have to answer to their shareholders and to its articles of association. This means there’s more flexibility in how things are run and you have full control over the business.
  • All the profit is yours! You don’t need to consider any kind of remuneration strategy as all of the profit will already have been taxed at your marginal rate of tax.

 Key disadvantages of being a sole trader

  • Lack of limited liability. Your business isn’t recognised as a separate legal entity so any business debts or liabilities are also yours. As liability is unlimited, this means that your personal assets, such as your home, are at risk.
  • It offers less opportunity for tax planning. It’s trickier to plan tax efficient strategies and it’s often harder to sell the business or plan for succession.
  • There’s a lack of prestige attached to sole traders and some customers, usually larger businesses, won’t do business with sole traders. 

What’s a limited company?

Now we have a broad understanding of what a sole trader is; let’s consider what a ltd company is.

In simple terms, a limited company is a fictional person created in law, which is legally separate from its owners and its managers. We say “person” because in the eyes of the law the company has, to all extents and purposes, the same responsibilities and rights as a human.

A company must be registered with Companies House and file its accounts and tax returns annually with HMRC. Clearly, a company can’t make decisions about the business itself and so Directors are appointed and they’re responsible for running the business, and making profits for the shareholders, as well as making sure all aspects of Company Law are applied.

Types of limited company

There are lots of different types of limited company. Let’s take a quick look at them. 

Private Limited by Shares (LTD)

This is the most common type of corporate structure. Under this structure the company becomes a separate legal entity in law, as mentioned above, with limited liability for its owners.

Its owners are known as shareholders and they will purchase shares in the business either when it’s incorporated or at a later date. Generally, the shareholders’ personal liability, and therefore their exposure to the company’s business debts is limited to the value of the share capital they have purchased and have not paid for.

A company limited by shares is the typical way for most owner-managed businesses to operate. The shares usually have rights attached to them such as the right to receive dividends. That means they’re effective structures for planning and considering different ways to get paid. 

Private limited companies are created by registering one at Companies House. Accounts and other documents must be filed annually. Companies also need to file an annual tax return with HMRC and pay corporation tax on their profits – which must be calculated using UK Generally Accepted Accounting Principles.

Private Limited by guarantee

Generally, this structure is only used when the intention is to run a non-profit organisation – for example,  a charity. This type of company doesn’t have shares; instead, the owners provide a guarantee and are then legally liable if the business runs into financial difficulty. However, this is the full limit of their financial exposure.

Otherwise, this type of company operates in the same way as a company limited by shares; it will still need to file tax returns with HMRC and accounts with Companies House. It will also need to have directors, secretaries and comply with company law.

However, one key difference is that a company limited by guarantee is able to be registered for charitable status – as long as the articles of association specifically prohibit the distribution of profits to members.

Private unlimited company

This isn’t common in the UK. Essentially, this type of company is the same as a private company limited by shares. But crucially, the shareholders don’t have limited liability. Instead they are required to personally repay creditors in the event the company becomes insolvent or goes into liquidation.

One reason you might want a private unlimited company is that they aren’t required to file accounts at Companies House. This keeps certain details, such as turnover and dividends, out of the public record and so there’s an element of additional privacy. 

Public Limited company (PLC)

A public limited company is one with limited liability; however, unlike private limited companies a PLC will offer its shares to the public. These shares can be bought through open stock exchanges.

There are extra administrative requirements for PLCs, such as the requirement to have a trading certificate before trade can start, and they are generally only attractive for larger and more established businesses.

Limited Liability Partnership (LLP)

This is not strictly a form of company; however, it is included here because we’re being thorough! An LLP is essentially a standard partnership with the added benefit of limited liability – similar to ordinary companies.

Some professions are legally prevented  from operating through a limited company and in these cases it’s common for them to operate as an LLP.  

An LLP is incorporated through Companies House and must prepare an annual tax return to be filed with HMRC.

Limited liability

So what is limited liability? It means that the shareholders of the business aren’t fully liable for the debts of the business. So it protects their personal assets and means that if the business goes bankrupt, they can walk away without losing their personal assets.

It’s worth knowing that limited liability is often watered down with smaller businesses and in some instances becomes non-existent. This is because, if you wish to take on any sort of financing arrangement or credit facility, banks and other lenders will insist on a personal guarantee from the directors/shareholders. This therefore means that the personal assets are back on the hook; if the business can’t repay the finance, the lender can pursue the guarantors personally – in some cases going after the family home!

Directors and company secretaries

We thought it would also be handy to explain what we mean by directors and company secretaries.

A director is essentially the person who the shareholders give the responsibility for the running of the business. A director has lots of responsibilities and duties under Company Law. Some of these include:

  • The duty to promote the success of the company
  • Protect the interests of the shareholders and act in their best interests
  • A duty to act within the powers granted to them by the articles of association of the company
  • A duty to avoid conflicts of interest

A company secretary is also considered an officer of the company. It is not generally a legal requirement to have a company secretary but many companies will consider having someone in this post – particularly as they grow.

They’re responsible for ensuring that the company operates within all financial, legal and statutory regulations.

They will also generally deal with the administrative tasks required of the company in law – such as maintaining the company’s share register and ensuring returns are filed on time. 

Advantages of operating through a limited company

Running a business through a limited company offers several useful advantages:

Limited liability protection

We mentioned this briefly above but it’s probably the main advantage of operating through a limited company. It’s definitely one of the big reasons why lots of people choose to run their business through a company. After all, we all work hard to acquire our assets and it’s only natural to want to keep hold of them!

Limited liability provides a significant advantage for business owners as personal assets (such as personal savings, homes and other assets) are generally protected from being pursued in the event the business accumulates debts – or in a worst case scenario fails completely!

Separate legal entity

A limited company is a distinct legal entity, separate from its owners. This separation means that the company can enter into contracts, own property, and incur debt in its own name. This is an advantage because it simplifies business transactions and provides a level of credibility and professionalism that might not be present in other business structures.

Tax efficiency

Tax reliefs are generally more favourable towards limited companies than other business structures. Some reliefs, such as Research and Development tax credits, can only be claimed by companies. Limited companies also present more opportunities for tax planning strategies – particularly around business succession strategies and remuneration. A limited company is also easier – and generally more tax efficient -to sell than a sole trader business. Many of these tax reliefs and benefits can mean significant financial savings over the lifetime of the business.

Capital raising and investment

It’s generally easier for limited companies to get access to capital compared to sole traders or partnerships. For example, companies can  invite investment through the issue of additional share capital. This can often be vital for the growth of the business and isn’t an option for many other business structures.

Generally, lenders are also more comfortable with lending to a limited company due to the transparency and structure provided. But be aware that in the early days in particular the owners may be asked to provide personal guarantees – which erodes the limited liability advantage.

Perpetual existence

A limited company has perpetual existence, meaning it can continue to operate even if shareholders change or pass away. This continuity is essential for businesses with long-term goals and it provides stability and confidence to employees, customers, and suppliers.

It’s particularly useful in the event of the owner’s death as the company can still carry on its business activities. This is much more difficult if you work as a sole trader.

Rewarding employees

It’s generally easier to reward key employees through a corporate or limited company structure. This is because there are various tax-efficient share ownership schemes that a company can use to reward high achieving employees. It can be tricky to provide the same kind of incentives to employees in an unincorporated business as you would need to effectively make them partners in the business – something that’s messy to do and generally not desirable.

Perception

Rightly or wrongly, many businesses and people prefer to deal with a limited company over an individual. There’s a perception that a limited company is more likely to be established and more likely to have the resources to do the job effectively. This may be partly because of an understanding of the difficulty involved in maintaining and building a successful limited company.

General disadvantages of operating a business through a limited company

There are clear advantages to running a business through a limited company, but there are also some disadvantages that you need to think about. These include:

Administrative complexity

There are lots of administrative responsibilities when you’re managing a limited company. Some of these include:

  • Keeping financial records
  • Preparing annual accounts and filing a company tax return
  • Complying with company tax law
  • Ongoing Companies House administration

Many small or new business owners can find the admin overwhelming and hard to understand, particularly when they only have limited resources.

Cost of compliance

With increased admin costs come increased professional fees and increased compliance costs. A limited company will probably need to use an accountant and tax advisers on an ongoing basis. There may well also be lawyers and other professionals needed to make sure all regulatory requirements are being met. There’s also a higher cost for corporate governance procedures implemented by HMRC and the government. All these costs eat into company profit and, ultimately, the amount of money that the owners can take from the business.

Reduced privacy

Company accounts are generally available on Companies House for the public to scrutinise. This is less of a problem for new or small businesses as they generally only file micro-entity accounts. However, details of the company and its officers (including their names and addresses) are available and searchable public material. Not everyone is comfortable with this.

Restrictions on capital withdrawal

You can’t just take the money of the business as though it was your own. It isn’t yours – it’s the company’s property. Therefore, limited companies generally have more complex processes for extracting the profits of the business.

For example: a dividend will need to be voted on – with all the accompanying admin that’s involved, such as preparing meeting minutes and dividend vouchers.

Double taxation

Company profits are subject to corporation tax. If the owner of the business then wants to take a dividend this money is then charged to income tax – meaning the same income is taxed twice.

With the increased corporate tax rates companies aren’t actually as tax efficient as they once were and quite often people will incur higher tax charges using a company than if they carried on a sole trader.

Running a property business through a limited company

Running a property business through a limited company has some unique advantages and disadvantages. Let’s take a closer look.

Advantages for property businesses

Property businesses, such as real estate investment or property development, are often limited companies. There are several specific benefits to operating a property business through a limited company:

  • 1. Protection of assets – there is generally a lot of capital at stake when property is involved. The limited company structure can shield personal assets from potential property related liabilities such as tenant disputes or mortgage arrears.
  • 2. Tax efficiency – full relief for mortgage interest was withdrawn for sole traders several years ago. However, companies can still benefit from this relief and can save a large amount of tax by getting a full expense deduction for mortgage relief. This is appealing to investors. 
  • 3. Ability to raise capital – property acquisitions or development projects are expensive undertakings. It’s possible to use the share structure of a company to raise finance without going through a traditional lender. This can help with growth and expansion in the property sector as venture finance and private equity take a keen interest in property portfolios.

Disadvantages for property businesses

There are also plenty of challenges when choosing to run a property business through a limited company. Specifically:

  • 1. Stamp Duty Land Tax – if you transfer property to a limited company you’re likely to incur a Stamp Duty Land Tax charge. Also, companies often have higher rates of Stamp Duty Land Tax when buying properties. It’s important that professional advice is sought, and this can increase costs.
  • 2. Admin requirements – property transactions are complex, and get even more complicated when there’s a company inserted between the individual and the lender. There are a host of professional fees that can increase costs. Additionally mortgage companies may insist on personal guarantees from the owners – which reduces the benefit of limited liability.
  • 3. Reduced mortgage options – lenders may have less favourable commercial terms for companies and only offer products with higher interest rates. Although this is often offset by the tax relief available to companies. 

Case studies

To get a clearer understanding of the advantages and disadvantages of limited companies, we’ve prepared two case studies – one looking at a property business and another looking at a trading business.

Property business case study

Case Study: “I Love Properties” Ltd

I Love Properties Ltd is a limited company that specialises in investments and development. It has built a wide portfolio of commercial and residential properties across the South East of the UK valued at £5million. Let’s explore the advantages and disadvantages encountered by I Love Properties Ltd:

Advantages

  • Asset Protection: The value of the property portfolio is high; therefore the owners are grateful for the limited liability that the company affords them.
  • Tax efficiency: The company has been able to save a significant amount of tax through being able to deduct the mortgage finance interest in full. It has also saved a large amount of Capital Gains Tax on disposals of properties over the years. This is because companies historically paid tax at 19% while individuals paid Capital Gains Tax at 28% on residential properties.
  • Capital raising: I Love Properties Ltd has brought in private equity finance through the issue of additional shares. This raised a large amount of capital that they used to buy a factory and warehouse.

Disadvantages

  • Administrative requirements: The company has incurred significant amounts of professional fees to deal with the additional admin costs of operating a property business through a limited company.
  • Mortgage options: The company has often been quoted higher mortgage rates than the owners would have got as individuals.

Trading business case study

Case Study: “Researching the Future” Ltd

Researching the Future Ltd is a high-tech limited company specialising in developing innovative software to solve problems of the future. They have ambitions to one day develop into a Public Limited Company – all it takes is one major innovation and they could be there!

Advantages

  • Limited liability: There’s a lot of risk in a business such as this; ideas are only great if they result in a sellable product at the end. If they don’t then the business has a lot of costs and makes a lot of losses. While the owners wholeheartedly believe in the business; they’re glad their personal assets are protected.
  • Tax Planning: Researching the Future Ltd has been able to take advantage of the generous Research and Development Tax relief over the years. This has resulted in vital tax savings for the company.
  • Professionalism: The owners believe that they have had more opportunity to pitch their ideas and bring investors onboard because they’re a limited company. They believe this has given them more credibility and an air of professionalism.

Disadvantages

  • Public discourse: The company’s financial information and director details are available to the public. There’s a risk that business details are being exposed to competitors.
  • Administrative costs: Significant amounts of money have been spent on professional advisers to make sure the company complies with all regulatory and industry-specific regulations. The owners suspect they have sometimes been charged more than a sole trader would have been – because they’re seen as an established company.

Legal considerations and regulations

There are a number of legal considerations and regulations to think about when you operate a limited company. This can either be seen as an advantage or a disadvantage – depending on the value you give to the initiatives.

Corporate governance

There are a range of different corporate governance standards that your company needs to stick to. For example, the requirement to file a confirmation statement every year at Companies House – or the requirement to have a policy on Corporate Criminal Offence. There can be stiff penalties for not complying fully with your corporate governance requirements.

Tax laws and regulations

The tax laws that apply to limited companies are complex and there are a multitude of legal obligations and deadlines that need to be met. Getting it wrong can lead to large financial penalties – and even criminal prosecution of the company’s directors in the very worst cases.

Industry specific regulations

Depending on what your business is; you might find that there are specific regulations for your industry that limited companies must stick to. These may relate to things like licensing, permits and intellectual property rights for example.

The role of professionals

Running a limited company involves a lot of admin. This means you’ll probably need a number of professionals to be involved if you decide to operate your business through a limited company. This section will run through some of the professionals you are most likely to encounter and need

Accountants and financial advisors

These are crucial in helping your company manage its finances and ensure that it complies with all financial reporting requirements. An accountant, or specialist tax advisor, will also provide guidance on minimising your tax liabilities – for example by claiming reliefs. These types of advisers are usually heavily involved in all aspects of running a limited company – from raising finance to advising on investment decisions and even on to business growth strategies.

Legal counsel

You will likely need the services of legal counsel at some point. This may be to ensure your business is complying with regulations but, also just as likely is that you may need legal support with employee or consumer related issues. If you run a property business you will need conveyancing solicitors – as these are a legal requirement in the UK.

Payroll providers

Businesses with lots of employees often outsource the administration of payroll to third party companies. These are generally straightforward to deal with, but it’s worth getting your tax adviser to check that they’re applying the rules correctly on behalf of your employees, as this something that HMRC take a good look at. 

HMRC

You’ll almost certainly be in communication with HMRC professionals at some point. You’ll need to engage with them for simple admin tasks like registering for self assessment; all the way through to potentially having a VAT compliance check or a Corporation Tax enquiry to deal with. If you find yourself in that spot then it’s best to let your accountant take the lead!

Future trends and protections

The business landscape is constantly changing. Some potential trends to consider are:

1. There is a push for increased digitalisation of the tax and financial reporting systems. Not all software currently available caters appropriately for limited companies and the ones that do can be expensive. HMRC are committed to moving all businesses to digital functionality so it’s likely this trend for more digitalisation will continue.

2. Tax reforms – there have already been a number of negative tax changes for company owners in the last few years. First the tax rates have increased quite a bit (and the Corporation tax rate now can be as high as 25%). Secondly, the tax rate for dividends has increased by 1.25% and the dividend allowance has been reduced significantly. This means that it’s often more tax efficient just to pay yourself a salary now – which is taxed higher than if you had remained a sole trader! Confusing!

3. Push for more corporate governance – HMRC and the government continue to bring in more and more layers of corporate governance such as sustainability reporting. All of this adds to the administrative burden and increases the costs of running a limited company.

Conclusion – Sole trader vs ltd company

Overall you can see that there are both advantages and disadvantages to running your business through a limited company.

For many people the attraction of limited liability is enough to overcome the potential for administrative complexity and compliance costs.

However, when you take into account that many of the tax advantages have been eroded in recent years, those extra costs can have quite an impact on the amount of profit that’s left for business owners. 

Ultimately, when looking at what structure is right for you (sole trader vs ltd company), it’s important that you consider all these factors before you make a decision. As well as thinking about the specific needs of your business and industry, also consider your personal goals for your business – and your life. 

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