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Sole Trader Vs Limited Company

Starting a business is an exciting time and there is a lot to think about. It’s important to have a checklist before you start and ensure that you are clear on your business aims and plans. Before you even get that far, however, the question for many individual start-ups is whether to set up as a limited company or sole trader.

What’s the difference between sole trader versus limited company?

Sole trader

In the simplest terms, a sole trader is someone who is the sole owner of their business. This appeals to many as it’s a simple business structure and allows you privacy and less paperwork, aside from your self-assessment1 tax return. However, this approach means the owner and the business are legally one entity. If your business hits a bump in the road, you are personally liable, along with your personal assets.

Limited company

A limited company has a separate identity from the people within it. Many start-ups choose to operate as a limited company with the same person being both shareholder and director. A limited company offers complete name protection, whereas any sole trader can use the same name as another. There is less privacy with this setup, however, as your financials are in the public domain with Companies House.2

Business expenses

Limited company expenses

As a limited company, you can only legally claim expenses that are incurred as part of your business, so things that overlap like personal and business travel will have to be separated. However, the list of costs that can be included is long and includes office space, equipment, travel, advertising, and general bills. The majority of these expenses can be offset against your corporation tax, but there are some exceptions to this rule. Expenses can be taken straight from your business bank account or claimed afterwards.  

Sole trader allowable expenses

A sole trader can claim most of the same things in expenses as a limited company owner, as long as it is wholly for the company. The main difference is in the recording and submission: most sole traders log their expenses when they complete their self-assessment and will be required to show proof in order to get tax relief on expenses. For both a sole trader and a limited company, it is recommended to get a good accountant to help you through the process: a good overview on taxes and expenses for each can be found here.

Sole trader insurance and limited company insurance

Both types of business structure will require solid insurance policies. Your existing home insurance is unlikely to cover you for commercial activities, and your client and supplier contracts will need you to be fully insured. Accidents come under public liability cover. Professional indemnity insurance, meanwhile, covers you for any disputes over works carried out. Business contents, stock insurance, and even cyber insurance might all apply to you, depending on the nature of your organisation, so do take the time to research what is best for you and your business - more info can be found here.

Changing from a sole trader to a limited company

Many sole traders choose to change to a limited operation as their business grows, and while the process of setting up as a limited company is relatively simple, there will be some tax implications – HMRC will need to be informed,3 the value of your sole trader operation will need to be established, and any tax relief calculated.

The main advice to any business start-up when it comes to deciding whether to be a sole trader or to operate as a limited company (or to change from one to the other): speak to the experts. Good accountants and insurance brokers are often cited by start-ups as some of the most valuable investments they made. They will save you money and time in the long term, advising on the best approach for you and your business as it grows.

 Sole trader or limited company

1. gov.uk/log-in-file-self-assessment-tax-return 
2. gov.uk/government/organisations/companies-house 
3. gov.uk/change-to-your-business

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