Differences between a limited company and a sole trader


A sole trader is a self-employed individual who enlists a business with HMRC. As a sole ownership, you may hire other people but you will completely be in charge of the business as well as its liabilities – there exists no lawful difference between you and your company. It is necessary you register for Self-Assessment, pay Income Tax and National Insurance Contributions on every taxable income and file Self-Assessment tax returns.


  • You can register as a sole trader online in a few minutes.
  • It is not necessary you register with Companies House.
  • There is no cost for enlisting a business.
  • It is generally affordable to start.
  • Minimal accounting, record keeping as well as filing specifications.
  • Accounting costs are generally lower – it is possible to carry out your own accounts and tax-returns.
  • The control and ownership of the company is in one person’s hand
  • Decision making and modifications are fast and easy to make.
  • Business-related charges and expenditures are not liable for tax.
  • All profit after tax belongs to the sole trader.
  • No business or personal information is placed on public record.


  • Sole traders possess unlimited liability for every business debts and claims as there is no legal difference between business finances and personal finances.
  • The sole owner is responsible for all decision makings.
  • It can be more difficult to raise startup capital.
  • All taxable income of the sole proprietor is liable for NIC and Income Tax.
  • Oftentimes, larger companies and lenders see sole trader businesses as more of a risk compared to incorporated companies.
  • Habitually viewed as small and less established – wrongly or rightly, limited companies are taken to be more credible and professional.
  • It is not as tax-efficient as limited companies.
  • It is always not likely to meet the requirements for both sick and maternity pay.

Limited companies

A limited company is a form of business structure, which is registered with Companies House. It is a different legal entity that is totally separate from its owners and thus liable for its own debts and finances – the owners of the company profit from reduced financial liability for business debts in the form of limited liability.

The majority of the companies are limited by shares and owned by subscribers (shareholders). Some companies are limited by guarantee and owned by guarantors – this is a typical structure for non-profit organisations whose owners never take a part of the company’s profits. Limited companies are managed and controlled by at least one director, who may or may not be one of the company owner(s).

Advantages of the Limited company structure

  • Different legal body that is separate from the business owners.
  • Limited liability – Individual finances and assets of guarantors/subscribers are sheltered more that what they agree to invest in the business.
  • Professional integrity and enhanced status.
  • It is most times viewed as larger and established businesses, even though they are owned and controlled by just an individual.
  • It appeals to a wider range of potential clients.
  • It is generally easier to raise capital from investors and lenders.
  • It is easier to grow the business.
  • It enjoys continuous existence, which implies it remains in existence away from the participation of the original owner(s).


  • It needs to be registered with Companies House. However, it is not time-consuming.
  • It needs to be registered with HMRC for corporation tax whilst active.
  • It may be expensive to establish.
  • There are some limitations when selecting a company name.
  • It is impossible to enlist a limited company if you are an undischarged insolvent or you have been banned from being another company’s director.
  • You need to have a certified office address in the same part of the UK where the company is registered.
  • The directors must supply a service address.
  • Details about the company is put on public record including service addresses, registered office, shareholders’ details, directors’ details, financial activity as well as filing history.
  • Accounting and filing needs are more challenging and takes time compared to sole owners’ administration.

Is it necessary I register with Companies House to be established as a sole trader?

It is not necessary. Registering with Companies House as a sole trader is only required should you are establishing a Limited Liability Partnership (LLP) or a limited company. To function as a sole owner, you need to be registered with HMRC for Self-Assessment. This is a really easy task that can be completed online in just few minutes by supplying the details below:

  • Full name and residential address
  • National Insurance number
  • Personal contact details
  • Name and address of your company – you can use your own name and your residential address, except your business has a distinct name and different trading address.
  • Date you start trading
  • Major activities of your business
  • HMRC will forward a letter to the address of your business within days of registering online. This letter contains your Unique Taxpayer Reference (UTR), and details of your duties and commitment as a sole trader.

Tax efficiency –corporation tax and Income Tax

Sole proprietors pay Income Tax on every taxable profit while limited companies pay corporation tax on every taxable profit. Based on the amount of profit your business makes, a limited company could be more tax productive due to the fact that corporation tax is presently set at 20% on every business profits, while Income Tax rates differ from 20% (about £31,785 yearly income), to 40% (£31,786 – £150,000) and 45% (income more than £150,000).

By running your business as a company, you can minimise your NIC and Income Tax by taking the salary of a director up to your Personal tax-free Allowance of £10,600 or the NIC threshold of £8,060 (2015-16 tax years). The remaining part of your income can be taken as bonus payments.

Changing your business from sole trader to limited company

It is possible to change your sole proprietor business to a limited company in as a little as 3 working hours by forwarding an online application to Companies House. All you need do is to enter the information below into the registration form:

  • Company’s name
  • Details of the company’s shares (if appropriate)
  • Enlisted office address
  • Details of guarantors or shareholders (at least one and can be the same person as the director)
  • Details of the Directors (at least one)
  • Service address of directors
  • Articles of association and Memorandum
  • Applications are submitted electronically to Companies House. Immediately it is approved, your new company can start trading the very same day and you will receive electronic copies of your registration documents through email.

Do sole owners and limited companies need business insurance?

Several limited companies and sole owners are not legally mandated to take out any form of insurance except they hire people, in which case worker’s Liability Insurance is needed.  Nonetheless, we strongly suggest that businesses safeguard themselves from injury claims and property damage by taking out public liability insurance.