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What are the differences between Sole Trader and Limited Company?

What are the differences between Sole Trader and Limited Company?

A friend asked me whether she should set up as a sole trader or as a limited company for her new business venture.  A difficult question to answer and one that has been asked of small businesses for many years, so what are the differences? This is useful reading for those who are studying for any of the CII AF2, AF5, J03, R01, R03 or R06 exams.

This article is relevant to examinable tax year 2017/18.

What is a sole trader?

A sole trader is a self-employed person who runs his/her own business.  A good reason for setting up as a sole trader is simplicity. As well as receiving all the profit though, they are also liable for any debt.  When the individual dies, the business dies also.  As far as tax is concerned, the person pays income tax on the profits from the business as well as class 2 (flat rate) and class 4 (profit related) national insurance contributions.  A self-employed person has to keep accounts of course, but they don’t have to be made public.

What is a limited company?

A limited company is privately owned with limited liability, which means that the owner’s liability for debt is limited – it is the Company that is sued, not the individual.  The Company is a separate entity from the director/main shareholder, and any earnings belong to the Company.

As far as tax is concerned, a limited company pays corporation tax on its profits at 19% (and a company tax return has to be filed 12 months after the year-end) and the employees (the directors) pay income tax and NI on their salary. The employer has to pay NI as well on the Employee’s salary and on any bonus they might receive. Drawings of dividends are subject to income tax above £5,000 per tax year but are not liable to national insurance. A limited company also has to keep accounts, but they do have to publish them with Companies House and so they are available to anyone who cares to have a look.

Sole Trader or Limited Company? Which is best? Click To Tweet


So which is best for my friend?

Well it depends a lot on how much money she thinks she’s going to make.

With smaller profits, it may be that the sole trader route is better – with larger profits, then it is often more tax efficient to trade as a limited company, because salary up to the personal allowance can be taken, with the rest taken as dividends, which pay no NI and also enjoy a dividend allowance. But other reasons could be to protect personal assets and give a more professional feel to her business, which would help with getting credit from suppliers.

However, directors of limited companies have more paperwork to deal with and also have more statutory obligations as they are regulated by Companies House.  Even if they have an accountant, the ultimate responsibility to provide accurate accounts still lies with the director.

There is no right or wrong business structure for my friend – it’s usually the one that best suits the individual situation, but hopefully with a few more facts and an understanding of the main benefits of each option, she can now make an informed decision.

A lot of people starting their own small businesses start off as a sole trader and move to become a limited company later on.

Over to You…

Any tips from those who have had to ask themselves or help their clients with the sole trader or limited company dilemma, we would be pleased to hear from you.

Grab the resources you need!

If you’re studying for your CII AF2 exam, and you feel you need more practice, grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF2 calculation workbook taster now!

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Alternatively, you can download taster resources for AF5J03, R01R03 or R06 if one of those exams is in your future.


  1. Peter Turner 4 years ago

    If you come under the jurisdiction of the Financial Ombudsman Service you would be out of your mind not to trade as a limited company or limited liability partnership.

    This is because FOS has chosen to ignore the 15 year long stop for negligence claims that applied to any other professional.

    I have seen old men forced to meet claims about events that took place a quarter of a century ago that nobody can really remember anything about and for which they have no insurance.

    I have seen widows forced to face complaints about advice given by their late husbands.

    But claims against advisers who traded as limited companies who have no retired and wound the business up always fail as there is nobody to claim against (unless a director has given a personal guarantee).

    Companies House does require accounts but for small firms these can be abbreviated. In many cases nothing more than a Balance Sheet – and you can arrange for it the accounts to be submitted online at the same time as the tax return.

    • Author
      Catriona Brand 4 years ago

      Hi Peter,

      Thanks for adding this to the post – some really useful and thought provoking info!


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