Please note that we close at 5pm on Friday 22/12/23 and re-open at 9am on Tuesday 2/1/24. Merry Christmas and a very HAPPY NEW YEAR!!

Sole trader versus limited company: what’s best for business?

by Michael Blaken

Published on 8th December 2022

When you first start a business, a decision that needs making is whether to become a sole trader or set up a limited company.

sole trader versus limited company

Equally, you may already be operating as a sole trader, but want to work out if moving to limited status could be beneficial.

With the challenges facing the economy currently, some directors might even be wondering if their decision to incorporate was wise. With dividend tax and corporation tax rising, could being a sole trader carry less of a tax burden, or even a reduced admin burden.

There’s certainly no one-size-fits-all answer, because each carries its own advantages and disadvantages. If you’re wondering which way to jump, this might help you decide:

Advantages of being a sole trader

There are fewer admin costs to being a sole trader. In a nutshell, it is cheaper and easier. Contracts with clients just have to be in the individual’s name, not the company name. Accounting is more straightforward.

If the cost of a car is to be put through the business, sole trader status is more flexible. This is because here, the car cost carries no benefit in kind. Generally, tax which is incurred for putting a car through a limited company will be higher – but there is an exception; if you have an electric car through a limited company this will be cheaper.

Financial information does not need to be made public. If you’re a sole trader, there is no requirement to register with Companies House and submit annual accounts, that anyone can view. This may or may not be important to you. You may want to keep your financial information confidential, or you may be happy for public scrutiny. It is something to consider.

Advantages of being a limited company director

As a limited company director, you are more in control of your taxes. When you are a sole trader, you are taxed on the profits you make regardless of whether you spend the money or not, outside the business. If you make £100,000 profit, but only spend £25,000 with the rest sitting in a savings account, you are still taxed on £100,000. In this example, this pushes you easily into the higher rate tax bracket, and (if you’re a parent) you’ll no longer be able to take advantage of child benefit.

The situation is very different if you run a limited company. Here, you are taxed personally only on the dividend or salary you draw. In our example, if you make £100,000 profit you only pay 19% corporation tax and personally pay tax on the £25,000 you take out of the business.

This is the exact situation facing a client of ours, and we have suggested she seeks the advice of a financial planner, who will talk to her about putting the remainder into a pension fund, which is also more tax advantageous, with a limited company.

There is less risk in a limited company. If you have customers who don’t pay, and you can’t then pay your suppliers, then it is your limited company which is liable, not you personally. The company may go into administration, but your personal assets will be unaffected. As a sole trader, if you fall into debt with suppliers and court action ensues, you are personally liable.

If yours is a business that doesn’t have lines of credit, you have minimal risk. If, however, you have creditors – for example, you are a builder and need income to pay for your building material suppliers and sub-contractors – then the risk is higher.

Depending on your type of business, there may be an advantage to running a limited company, in terms of how you are perceived. Some businesses may not want to deal with a sole trader, or they may assume you are too small.

Equally, you may have a limited company which has minimal turnover – and we deal with limited companies whose turnover is as low as £9,000 – but the assumption is that they are larger, and this might open doors to new clients. Whether or not this factor is an advantage, really depends on how you want to position yourself.

Some tax credits, such as R&D, are only available for limited companies. This is an area well worth exploring if you are planning to invest, because R&D covers a wide area. Among our clients are IT specialists who have created new software, and another making new-to-market tools.

Similarly, the Super Deduction Scheme for investing in qualifying new plant and machinery assets is only available to companies.

When we work with clients, we talk through all the options and help them decide the best business model to suit their particular circumstances. If you are setting up in business, or thinking of pivoting from sole trader to limited company, please get in touch with the accountancy team at Optimum.

We support businesses owners in Swindon, Wiltshire, Cheltenham, Gloucestershire and the wider area, with their business planning and tax planning.

Next post...

Optimum raises £4,500 for Youth Adventure Trust

We are thrilled to announce that after two years’ fundraising we have collected a fantastic £4,500 for our charity, Youth Adventure Trust.

Read more

Previous post...

Get ready for new VAT points-based penalties from 2023

HMRC is bringing in a new regime for VAT penalties, starting on 1 January 2023 which VAT-registered businesses need to be aware of.

Read more

Stay up to date