Limited Company vs Sole Trader: What's the difference?

When you’re researching self-employment opportunities, you’ll likely come across a variety of different legal business structures to choose between. Most people, where possible, will choose to either set up a Limited Company or become a Sole Trader as these tend to be the most lucrative ways to work if you’re able to do so compliantly.

Here, at Workwell, expert contractor accountants explain the difference between Limited Company and Sole Trader worker models to help you decide which one is best for you when you’re just getting started.

Limited Company

A Limited Company is its own legal entity, separate from its shareholders and directors (even if you are just one person acting as both shareholder and director). A Limited Company has its own income and expenditure, can enter into its own contracts, and has to pay its own taxes. 

If you’re setting up a Limited Company for contracting purposes, this is commonly referred to as a Personal Service Company (PSC).

Sole Trader

A sole trader is a self-employed individual who is the sole owner of their business. It is one of the simplest and most popular business models amongst the self-employed community because you can simply start trading, filing a Self-Assessment Tax Return at a later date.

How to decide?

Both legal structures have their pros and cons. Which one you choose will be largely dependent upon the type of work you expect to take on going forward, the level of your projected earnings, and how much time you’re willing to dedicate to admin and accountancy responsibilities from the outset.

Sole Trader Advantages

- Working as a Sole Trader is an extremely simple way to work. You’ll have less paperwork than if you’re a director of a Limited Company as it won’t be necessary to submit information to Companies House or HMRC each year.

- You’ll have less expense because your accounting process is a lot simpler. If you decide to work with an accountant as a Sole Trader, it is often cheaper than if you’re a Limited Company contractor.

- Limited Companies are required to submit details to Companies House that can be accessed by the public, such as names of directors and shareholders. As a Sole Trader, you will have greater privacy as you won’t be legally required to provide this information.

Sole Trader Disadvantages

- As a Sole Trader, you’re not viewed as a separate legal entity. This means if your business is in debt or has any legal issues, you, as the business owner, are liable and could lose personal assets.

- Banks and other investors tend to trust Limited Companies more than they do Sole Traders. This can occasionally cause problems when you’re searching for bank loans or investor opportunities, potentially limiting your expansion opportunities.

- Tax rules are different for Sole Traders and Limited Companies. As a Sole Trader, you pay income tax and national insurance on your trading profits. This means if you reach a certain level of earnings, you may have more tax to pay than if you set up a Limited Company. 

Limited Company Advantages

- Your Limited Company is a separate legal entity to you personally. This means if your company becomes bankrupt or encounters a legal issue, you have a greater deal of protection on your personal assets – you only stand to lose what legally belongs to the company. 

- As a Limited Company, you pay Corporation Tax on your profits rather than Income Tax and you can pay yourself through a combination of salary and dividends. This means it tends to be a more lucrative and profitable way to work – but you must check with your accountant to make sure this applies in your case. 

- You can also claim a range of business expenses through your Limited Company, including equipment, mileage, business trips etc.

- A Limited Company can establish its own credit rating, meaning you can borrow capital against your business account. For Sole Traders, you have to rely on your personal credit rating for business loans and investments, which can be problematic.

Limited Company Disadvantages

- As a Limited Company, you have a range of additional responsibilities (Director’s Fiduciary Responsibilities). These include the need to file your annual accounts, company tax return, and confirmation statement.

- Going Limited can be time-consuming as you’ll need to manage the extra paperwork and accounting responsibility. Of course, you can contact an expert contractor accountancy firm, such as JSA Group, who can help you manage your accounts and take away the burden of these responsibilities – freeing you to focus on providing the best possible service/product for your clients.

- You will be required to submit details about your business, including the names of directors and the company’s earnings, to Companies House every year. For some, this type of public transparency may not appeal.

Seeking Advice

Choosing which legal structure would work best for you is a very important decision and will vary from person to person. To help you get started and determine which structure will work best for your business, you should seek specialist accountancy advice to learn about the different responsibilities and predicted pay rates each option will offer. 

Workwell has been providing expert accountancy advice to contractors, freelancers, and the self-employed community for over 30 years, supporting over 25,000 contractors you can trust you’re in safe hands to receive the advice you need to get started. Explore their resources for new contractors here to help you start out on the right foot or enquire now.

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