Limited Company or Sole Trader – which is best for you?

Legal, Money

It’s the freelancer’s perennial quandary – should I stay as a sole trader, or form my own Limited Company? There are advantages of both, but also some drawbacks to be aware of. Remember every situation is different – some people may choose to go Limited for the added weight it puts behind their company name, some people may choose not to incorporate to as they don’t earn enough to take advantage of the added tax efficiency. The choice is entirely yours. So – should you go Limited?

Advantages of going Limited

Limited Liability

This basically means if you company goes bust, your personal belongings can’t be touched. Your maximum losses can only be up to what you put into the company in the first place – meaning you only stand to lose what you invested. Limited Liability can become invalid if you act illegally though – so don’t do anything naughty!

Added Employability

Many clients – especially big corporates – will be more inclined to do business with Limited Companies. For them it means your payment is purely a business transaction and they avoid the muddy waters of PAYE and National Insurance Contributions. In fact, many large companies (usually financial institutions) refuse to do business with Sole Traders.

Potential for greater profitability

As a Sole Trader, you’ll be taxed on your income. This means you’ll end up paying Income Tax and National Insurance Contributions on everything you earn. Once you get into the higher echelons of earning you could be seeing a significant chunk of your take-home pay being whisked away by the tax man. By operating through a Limited Company you will pay Corporation Tax of 20% (assuming your profits are less than £300,000), and can pay yourself through a combination of low wage (to minimise your PAYE and NIC outgoings) and dividends. This will result in less of your money going to HMRC, meaning more of it in your pocket.

You can claim business expenses through your Limited Company, such as equipment and mileage allowances. Sole Traders can also claim business expenses, although obviously they wouldn’t go through a Limited Company.

Borrowing power

As a sole trader you are reliant on your own personal credit rating to borrow capital – however a Limited Company can establish their own credit rating against which to borrow money.

You can also issue shares in your company as a method of raising funds – essentially selling part of your business at an agreed price.

Exit Strategy

As a Limited Company is its own legal entity, should you wish to hang up your hat, you can sell your entire business – clients, equipment and all. This can be a difficult task for a sole trader as typically the equipment used is owned by them personally, and many elements of the business will be tied to their specific identity.

Advantages of staying Sole Trader

No IR35 worries

The elephant in the self-employment room, IR35, only applies to people operating under a Limited Company, therefore you can avoid that mess entirely by simply not going Limited.

Less Paperwork

Both Sole Traders and Directors of Limited Companies are required by HMRC to submit a personal self-assessment, but those operating a Limited Company must also submit extra paperwork for their company (Annual accounts, Corporation Tax Return, VAT Returns if applicable etc.). As a sole trader you will avoid most of this – although you may find your accountant will take care of this for you should you decide to go Limited.

Simpler Accounts

As a sole trader you must submit a personal self-assessment tax return, however the accounting process for sole traders is much simpler than for Limited Companies, so accountancy costs can be cheaper.


Limited Companies must make certain information public, such as names of Directors and shareholders. These are available from Companies House to anybody upon request. As a sole trader you do not have to provide such information.

Want to form a Limited company?

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For more information on operating a limited company, check out Company Bug

Photo by Neo_II

  • Jglass10

     I have just moved to the UK, apart from getting a NI number an Public Liability cover is there anything else I need to do with HMRC before being able to work as a Freelancer as a Sole Trader??

    • FreelanceAdvisor

      Hi there,

      You’ll have to register yourself as self-employed – and make sure you’ve got the correct kind of Visa if you came from outside the EEC.

      Best of luck! 

  • Pingback: Limited Company vs Sole Trader – which is best for you? – new story on Freelance Advi | Job for freelancers, outsource firms and local workers.

  • flanntheman

    I have just changed to a limited company and am about to employ someone to help with admin and also to help with the kids – is this valid to put through the books – or just the admin/invoicing piece?

  • inkflinger

    Hi, nice article…  When you say “hire echelons” do you mean “higher echelons”..?

    • FreelanceAdvisor

      Whoops – nice catch, thanks :)

  • george.leontakianakos

    I am an aircraft sheet metal specialist with 23 years experiance,I have some suggestions to work in England, because my CV,but i do not know the English system, which can be referred in order to KNOW how i can work as freelancer or shelf employed and be perfectly legal.

  • John

    I work in a call centre which specialises in telesales. We’re paid a basic salary, plus any commission we earn on top. This commission is subject to various deductions based on performance. Our commission structure was altered, without our knowledge, in February, which now means any commission earned during that month is subject to the new structure. We weren’t made aware of these changes until April, a few days before we were set to receive our February commission. Do the company have a right to alter our commission, including money we had already earned, without our permission?

    • lesleyfurber

      Hi John, it’s going to depend if you are an employee of the company or freelance? If you are an employee then can change your terms and conditions but they need to do this in the right way and ideally with your agreement – more details here
      If you are freelance then they can change your contract and you have the choice to agree to it and stay or not. Hope that helps. Regards, Lesley, Workline

  • Jane

    I have recently been employed by a company as office manager. The company in question has just moved over from sole trader to limited company. What I wanted to know was does this invalidate our contract with the card merchant terminal supplier now there has been a change of entity?
    N.B. We are UK based.


    • FreelanceAdvisor

      Hi Jane,

      You’d have to look at the terms and conditions you agree to when you started using the terminal supplier.

    • Infosite4Business

      As your are now a different legal entity it would be wise to contact the merchant terminal supplier directly for advice.