Being a Self Employed Sole Trader vs Operating a Limited Company


If you have been running your own business by yourself, then you are considered as a self-employed person. One of the most alluring things about starting a business as a sole independent trader is that it is easier than going through the hoops of filling out the forms to register your business. Perhaps you have been trying to avoid registering your business as a limited company because of all the paperwork and legal framework and bindings involved. But have you ever paused to consider the fact that upgrading your business to a limited company comes with its advantages? Although, a sole proprietorship has its benefits too, but perhaps registering your business as a limited company is a step you need to take it to the next level.

Once you become sole proprietor in the UK, you need to register with HMRC as a self-employed person.


Who is a sole trader?

A self-employed is an independent contractor who is directly involved in generating income by owning and managing their own business or profession. That means if you are a sole trader who owns and runs your own business, you are self-employed. Before we compare a sole proprietorship with a limited company and discuss why you may want to upgrade to a limited company, we need to explain what it means to be a sole trader.


Unlike a limited company, there is no legal distinction used to separate a sole trader from the business. Liabilities and debts related to the business operations can be traced to and recovered from the sole trader because he is not a separate entity. If you want to limit the extent to which business losses and debts can be recovered from you, you may want to consider turning your private business to a limited company.

Additionally, A sole proprietorship must be distinguished from a partnership, which refers to at least two traders co-owning a business.


Advantages of being a sole trader

  • The registration process of a sole proprietorship is relatively easy and this makes it very appealing to most people.
  • The sole trader shares profits with no one, unlike a company or partnership with two or more person and mostly requires the splitting of profits.
  • It is much cheaper to start a sole proprietorship than to register a new company. Hence, this may be the reason why many people prefer to start as sole traders and upgrade to a company as the business progresses.
  • Such things as expansions, decision-making, legal changes, sale of the business, and so on can be much easier when one is a sole trader.



  • Since there is no legal distinction between the owner and the business, all debts and liabilities can be recovered from the owner.
  • Running the business on your own requires daily commitment, and there may be little time for anything else.
  • There is no one to brainstorm decisions with, and you may drive the business to the ground with just the wrong choices.

Why Upgrade a Sole Proprietorship to a Limited Company?

When you’re a sole proprietor, in the eyes of the law, there is no difference from a legal perspective between your business and You.

You receive the income from the business and pay the expenses, including the tax liability which you must pay as an individual. And, If you have income from employment as well as your self-employed income, you’ll need to declare it on your annual Self-Assessment tax return

If your business is a limited company, you will be taxed at the corporate tax rate of 19%. So, while it may cost you to start a business as a limited company due to registration fees, it may cost you less in taxes in the long run.

How Does a Limited Company differ from a sole proprietorship?

A limited company is considered a private entity (or public entity if it is  listed on the stock exchange) from its owners. Importantly, whether it is a private company or a public limited company, the owner or owners are not held directly liable for debts and other liabilities. If you sue a limited company, you sue it as a separate entity.

Private limited company shares are contributed by the owners and cannot be raised through a public offering. Public limited companies can raise capital through the public and can trade on the stock exchange.

In the UK, companies are registered through the Companies House. It is also worthy to note that most sole proprietorships are owned and managed by one person (perhaps with one or a few employees in some cases) while most companies invest in a large number of employees and in many cases a management team that oversees departments.


Advantages of a Limited Company

Registering your company as a limited company will gain you the following benefits.

  • A private limited company or a public limited company limits the owner’s liability. You are not directly liable for what the company owes to debtors, and your assets are safe unless a court of law gives special rights to creditors in the case of lawsuits.
  • In the UK, a limited company owner pays less tax than a sole trader, whose business income is taxed along with other personal income.
  • A limited company gives a better impression to third parties such as clients, bankers, government agents and potential shareholders. This is good for business.
  • Many limited company owners find that raising capital is more accessible than for a sole trader. Financing organisations and potential shareholders are more likely to invest with a company than a sole trader.
  • In many cases, the cost of starting a company is overestimated by most people.
  • A limited company has a higher chance of continuity and consistency. Most sole traders rely on the owner’s involvement and availability to stand or grow.
  • The statutory requirements of a limited company help owners to be keen on working professionally. These include the creation of accounts and proper records and the auditing of accounts.
  • A limited company makes it easy for the owner to draw a line between personal assets and company assets. This includes your own money and business money. This is an advantage to the owner and reduces the risk of personal loss.



  • Due to the statutory requirements, the owners or directors of a limited company need to ensure that they adhere to the rules and conditions.
  • Unlike a sole proprietorship, many companies require the approval of boards or shareholders to make significant decisions.


What Do You Require To Set Up a Limited Company in the UK?

You need to register with Companies House. All registered company have at least one director, who must be at least 16 years of age. Every limited company in the UK must file annual returns. When submitting, the following details must be provided:


Annual Returns

  • Registered company address
  • Name a location of the list of shareholders
  • State the type of business
  • The names of all listed directors and their addresses
  • If there is a company secretary, the name and address must be given
  • The type of limited company it is (private limited company, public limited company or limited by guarantee)
  • Share value issued and debenture details


Tax Returns

Limited Companies must also file corporation tax every year regardless of the performance/ Tax returns include the following information:


  • Losses brought forward from the previous period
  • Claimable tax relief
  • Gains made on asset disposal
  • Capital assets for assets purchased


Annual Accounts

A limited company is expected to file the Annual Accounts report. In many countries (such as the UK) there are fines for late delivery of annual accounts, just as there are penalties for the late filing of taxes, etc.


Other Requirements

Other statutory filing requirements include VAT returns, PAYE returns, Event filings and Confirmation statements.


You may have started a business as a sole trader. Upgrading to a limited company may depend on the reasons you chose to trade as a sole trader. If the problem was the initial cost of setting up a business, you need to consider the financial obligations (in relation to taxes) in comparison to a limited company. If you feel that your kind of business is better suited as a sole proprietorship, then you may stick to it. Many people may opt for a sole proprietor business if they use their skills for business or feel that their direct supervision is required. However, if you think that registering your business as a limited company will work better for your business, then you should go ahead. It is a good thing to be self-employed, but it is also a good thing to know when to go to the next level and become an employee of your business by making it a separate entity; that is, a limited company.

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