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Should I set up as a sole trader or limited company for my small business ?

When professionals decide to set up a small business – should they trade as a sole trader (self-employed) or set up a limited company?

The main difference between the two are:

As a sole trader, you are an individual generating an income, and therefore are taxed under income tax. Your profits are your income.

With a limited company, the profits taxed under corporation tax.  You receive income as a Director and/or Shareholder of your company.

Key Considerations

The first questions that we would ask someone looking for advice is:

  • What is it that you do?
  • Who are you doing business with?
  • Is there a specific reason why you feel you should be a limited company or a sole trader?

Sometimes a business has to be a limited company and set up that way from the beginning.  Often this is because the customers they’re dealing with have a requirement that partners or suppliers have that status.

Of course, it may make sense to set up as a sole trader and then convert to a limited company later when you are generating higher profits.  If you find your profits are in excess of £45k  this is the time to consider trading through limited company as the tax savings will outweigh the additional costs involved.   Ask us about our specific incorporation service to hold our clients hands through this process..

Of course, it’s possible that your decision could just be for purely personal reasons but here are some other things that may influence your decision:


 As a sole trader, you will pay Income Tax and National Insurance on all your business profits (even if you don’t spend it all personally).  A sole trader will pay income tax at either 20% and 40% depending on where their earning fall within the tax thresholds.  On top of this they will pay 9% NIC on their profits above the lower profits limit.

However, a company only pays 19% Corporation Tax and the owner will only pay income tax on any money they withdraw from the business as salary, bonus and dividends.

Income Withdrawal

As a sole trader, whatever profits you make, you can just withdraw all of that and use it as you see fit and HMRC don’t really care where you pay your tax from as long as you pay it on time!

For a limited company, you can only pay yourself a salary as a director which is deductible against profits and dividends out of profits after you have kept money to one side for your tax.  If you take money out that is not available to be taken, then it can cost you a lot more in taxations.  Running a limited company requires a strict discipline about how and when you take money out, and requires you to know how much is available at any point in time.


As a sole trader, you are liable for any debts that the company might run up. If you run into trouble, somebody could potentially come after you, the individual, and force you to do something to pay the debts back. A limited company is a separate legal entity which affords some protection – assuming the director hasn’t acted negligently.

 VAT Registration

Let’s just bust a common myth – you do not have to be a limited company to register for VAT!

However, if your turnover is above £85,000, you will need to register for VAT regardless of whether you trade as sole trader or company.

Expense Deductions

In general, most business expenses are deductible in both the sole trader type business, and a limited company. The two main exceptions to this are working from home allowances and treatment of cars and their related expenses.

The general principle here that is applied, is that whatever business expense it is, it must be wholly and exclusively and necessary for the purpose of the business.

Thinking About the Future and Exiting

When you decide to retire or want to move on and stop trading as a business, you can sell your assets, whether they’re office furnishings or a list of future income generating clients. The sole trader reports their final profits, stops trading and settles their final tax bill

Your limited company business needs a little bit of care and attention when looking to sell or retire, and this is definitely one of those times that it can be invaluable to speak to an accountant to help with tax planning before you actually stop trading.

In a nut shell…

There are many things to consider before you decide whether you should start out as a sole trader, or a limited company and it helps to think about where you want to end up in the long run, but talking to an accountant in the beginning would be a great place to start.  If you just want some ad-hoc why not book one of our Fixed Fee Focus sessions here


If anything you have read here has raised more questions, please feel free to contact us to see how we can help.