Limited Company or Sole Trader, Which is Better?

limited company or sole trader

If you are a small business owner, you will face many decisions sooner or later about the structure and legal status of your business. One of the most important choices you have to make is whether to operate as a limited company or a sole trader.

When it comes to determining the structure of your business, there are pros and cons on both sides of this discussion. Are you trying to decide which option is best for your business?

An accountant can help you make this decision and make important decisions when it comes to choosing whether to operate as a limited company or a sole trader.

Joanna Bookkeeping is a professional practice based in Oxford, UK, offering bespoke bookkeeping and accounting solutions for businesses nationwide.

Both structures are entirely viable, they can make your life easier or more difficult. But the decision you make will have a long-lasting impact on your business.

We’ve created a simple guide to help you decide whether it’s best to operate as a limited company or a sole trader.

Limited Company

A limited company (sometimes known as Ltd.) is a type of business structure that has its own legal entity, separate from its owners. This means that if your business gets into financial trouble, then only the company is liable and not the business owner personally. But at the same time, it means there are a lot of admin tasks, plus complex legal and reporting requirements involved in setting up a limited company. If you start a limited company, you’re required to register with Companies House and appoint a company director.

A limited company does not pay income tax and instead pays a corporation tax. This is calculated on the overall profit.


➡️ Has its own legal entity
➡️ Tax-efficient (less tax and national insurance contributions)
➡️ Ownership transfer is less difficult
➡️ You can extract money as dividends
➡️ Personal assets are protected
➡️ Greater sense of credibility and professional status
➡️ Easier to get funding (lower lending rates)

Operating through a limited company does have its benefits, but these aren’t the only factors you should consider before deciding if this is the right structure for your business. Let’s look at some of the disadvantages and key issues to watch out for when choosing this structure.


➡️ Complex admin, legal and reporting requirements
➡️ Higher set-up costs
➡️ Filing the accounts at Companies House every year (which will be public record)
➡️ Less privacy than a sole trader.
➡️ Withdrawing money can be more difficult
➡️ Restrictions with naming your business

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Sole Trader

Being a sole trader is the easiest way to start your own business and keep control of it. Running your own business as a sole trader can be great fun with a lot of personal freedom to make money. You don’t have the element of partners or shareholders to pay or share profits with, so you’ll have full ownership of profits.

If you’re a sole trader, the good news is that your tax responsibilities can be relatively straightforward. You don’t pay Corporation Tax and have no annual accounts to submit to Companies House. But sole traders need to submit a Self-Assessment Tax Return once a year and pay the relevant amount of tax and national insurance. Bear in mind that the reporting requirements for sole traders will change due to Making Tax Digital.


➡️ Simple to get started and operate
➡️ You don’t need a business bank account (although it’s strongly recommended)
➡️ Full control and more flexibility
➡️ More privacy than a limited company
➡️ Fewer legal requirements
➡️ Less paperwork
➡️ Ease of changing the structure of your business

A sole trader has much less paperwork and reporting requirements than a limited company. But it’s important that you take responsibility for all aspects of running the business and protecting your personal assets because if things go wrong you are personally liable to the fullest extent permitted by law.


➡️ Full liability (for you and your personal assets)
➡️ Raising capital can be limited
➡️ Taking time off or holidays can be difficult
➡️ Less flexibility when it comes to tax
➡️ Building a good reputation can be difficult

There’s no single answer that applies to everyone because choosing to be a limited company or a sole trader will depend on your personal circumstances. It’s not only a matter of which business structure will help you save more money because there are a lot of other aspects that play a part in the overall success of your business.

Here at Joanna Bookkeeping, we offer expert advice when it comes to making decisions about which business structure is right for you, so that you can focus on what’s most important, growing your business. Our team of professional accountants provide expert bookkeeping and accounting services, so you don’t have to worry about it! We work with all types of companies, from small businesses run out of homes to established enterprises.

Book a FREE call and have a chat with our Oxford-based accountants to learn more about how we can help your company succeed. PLUS – because we’re fully digital, we offer services to businesses all over the UK!

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