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Sole Trader vs Ltd Company

I was asked recently by a new business whether it would be better for them to register as self employed or become a ltd company and to be honest it really depends on your situation. Lets take a look at the pros and cons of both.

Legal Requirements

As a sole trader, you are the company and the only legal responsibilities you have are to make sure you are registered with HMRC and you file a self assessment tax return to pay personal tax on your profits. However as a sole trader you are liable for any debts and if you were sued, your personal assets could be seized.

As the director of your company, you are separate and your company is its own legal entity, meaning that you as the director are protected from any debts or losses. You are however responsible for safeguarding the company's assets and would be the one to make the decision to cease trading if you felt the company was no longer sustainable. There is also a lot more paperwork involved, you will need to register your company with Companies House and HMRC, you will be responsible for filing a set of accounts, a confirmation statement and a corporation tax return, plus as a director you will almost always have to file a self assessment tax return too. This also means that you will not have as much privacy as a sole trader because your financial statements will be viewable to the general public via Companies House.


It is sometimes more tax efficient to be registered as a ltd company because although you benefit from a personal allowance, you do have to pay classes 2 and 4 in National Insurance on top of your Income Tax and you are also required to make payments on account for your next tax year.

As a ltd company, you will pay Corporation Tax on the companies profits which is a lower rate than Income Tax and you can claim more in expenses such as food and drink for employees (including you as the director). As the director of your company and as long as it is making a profit, you can be paid by the company in Dividend's which is also a lower rate than Income Tax. You could also pay in to a private pension to further benefit from tax savings.


There aren't a great deal of costs involved as a sole trader unless you pay someone to file your tax return, however as a ltd company you may want to hire a bookkeeper to keep on top of your finances on a monthly basis and an accountant to file your accounts, statements and tax at your year end.

To decide on the best solution for you, it may be worth speaking to an Accountant or a Financial Advisor. They can look at your personal circumstances and help you decide on the most tax efficient route and if you need help with your bookkeeping, then please get in touch. I'd be happy to assist you.

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