If you’ve decided to go into business for yourself, then your next big decision is choosing whether to register your business’ legal structure as a sole trader or as a limited company.

Choosing the right legal structure when you start a business can influence how tax efficient you are as a business. To help you understand the pros and cons of each, our friendly team of accountants have compiled a quick start guide to operating as a sole trader versus as a limited company.

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

A limited company is a separate legal entity to yourself, whereas being a sole trader means there’s no legal distinction between you and the business.

As you might imagine, this has an impact on your obligations and requirements, as well as what you’re entitled to. The legal structure that you choose also has an effect on how you pay yourself, and even claiming expenses.

Use our calculator to find out how much you could take home as a sole trader versus as a limited company>

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 then HMRC sees you as 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.

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

Because there’s no legal distinction between a sole trader and their business, you’ll be personally liable for what happens in the business. And yes, sadly this includes any debts which are incurred!

A limited company means limited liability for the directors and shareholders. Any debts incurred 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!

Watch our video to understand what deadlines and obligations apply to a limited company.

Registering your business

The way you register your business is different depending on whether you decide to become a sole trader or operate as a limited company.

Registering your business as a sole trader

Sole traders register as self-employed by signing up for Self Assessment with HMRC.

Take note, the deadline for a sole trader to register for Self Assessment is 5^th October in your business’ second tax year.

So, if you became a sole trader in July 2019, make sure you’re registered for Self Assessment by 5^th October 2020 to avoid any unwanted 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.

We’ve written a guide to incorporating a limited company to help you get started, or you can watch our help video.

Learn more>

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.

About The Author

Elizabeth Hughes

An SEO Copywriter and Content Creator. After more than ten years of enjoying myself by turning difficult subjects into elegant, simple language, I still can't believe I get paid for this.