When you decide to start your own business, one of the first big decisions is choosing whether to register as a sole trader or as a limited company. Choosing the right legal structure for your new start-up can affect how tax efficient you are as a business.

There are pros and cons of any type of business structure, so deciding which one is best for you really depends on your particular circumstances. To help you choose, we explain the differences between operating as a sole trader versus as a limited company.

What’s the difference between a sole trader and a limited company?

Starting up a limited company means that the business is a separate legal entity to yourself. This means that any money the business makes belongs to the company. If you decide to register as a sole trader it means that there’s no legal distinction between you and the business.

This idea of legal separation between you and the business is absolutely crucial. It impacts your obligations as a business owner, reporting requirements, and even how you pay tax as a business.

The legal structure you use to operate your business also affects how you pay yourself and how the business claims expenses.

How do I pay myself as a sole trader or a limited company?

As far as HMRC are concerned sole traders and their business are the same thing, so they can keep all of the after-tax profits that the business makes. Sole traders pay tax and National Insurance on this income by submitting a Self Assessment tax return to HMRC.

If you operate as a limited company you’re a completely separate entity, so the profits belong to the business. Obviously you want to make money from your business, so instead you might pay yourself a salary as an employee of the company, or dividend payments, or both. Check out our article about dividend tax to learn more.

What am I liable for as a sole trader or as a company?

There’s no legal distinction between a sole trader and their business, so you’re personally liable for what happens. And yes, sadly this includes any debts! Forming a company limits liability for the directors and shareholders. Any debts are the company’s liability, and not yours personally.

Obligations and deadlines for sole traders and limited companies

Being a sole trader means there is slightly less admin than there is if you run a limited company. You’ll still need to keep detailed records of financial activity for your business whichever structure you choose, though dedicated accounting software like Pandle can make this much easier.

Watch our video to learn more about your obligations and deadlines as a sole trader. And yes, we’re organised-accountant-types, so we’ve made one for limited companies, too!

Choosing the right legal structure for your new business

How you decide to operate your business depends on you, but there are a few points to consider:

• Is your profit figure around £30,000 or more?
• Is this a high-risk business in terms of potentially liability? For instance, dealing with the public a lot.
• Do you have an income from another job?

It’s not cast-iron, but answering yes to any of these can indicate that registering as a limited company might be more beneficial than becoming a sole trader. This is because the level of income suggests that incorporating a company is likely to be more tax efficient for you.

Registering your new business

The way you register your business depends on whether you decide to become a sole trader or operate as a company.

Registering your business as a sole trader

Sole traders register by signing up for Self Assessment with HMRC. The deadline for a sole trader to register for Self Assessment is 5^th October in the business’ second tax year. So, if you became a sole trader in July 2020, make sure you register for Self Assessment by 5^th October 2021 to avoid any fines!

Registering your business as a limited company

Setting up your business as a limited company has a slightly different process than becoming a sole trader. You’ll need to register the business with Companies House, which will sign you up for Corporation Tax and issue a certificate of incorporation. Check our our guide to incorporating a limited company to help you get started.

Find out more about how we can help you take care of your business finances. Call 020 3355 4047 or press the Live Chat button on screen. Or, get an instant quote online.

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About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.

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