Sole Trader vs Limited Company: Which Structure Is Right for You?

What are the benefits of being a limited company instead of a sole trader?

Tax advantages

Limited companies pay Corporation Tax (currently 25%) on profits. Sole traders pay Income Tax on all profits, which can be higher if you’re a higher earner. Additionally, directors of a limited company can take money as a combination of salary and dividends, which can be more tax-efficient.

Limited liability

A key advantage of a limited company is protection of personal assets. If the business runs into debt, your home, car, and savings are generally safe. Sole traders, by contrast, have unlimited liability.

Professional image and credibility

Clients and investors often perceive limited companies as more professional and established. Being incorporated can open doors to contracts, funding, and partnerships that might be harder to secure as a sole trader.

Who earns more, sole traders or limited company directors?

Income tax vs corporation tax

For low to moderate profits, sole traders may pay less overall tax due to the personal allowance. However, as profits rise, a limited company can be more tax-efficient, because Corporation Tax plus dividends may be lower than higher-rate Income Tax.

Dividend payments explained

Dividends allow directors to take profits outside of salary, reducing NICs. This is a key reason many growing businesses switch to a limited company.

Which is better for different income levels

• Profits under £50k–£60k: Sole trader may be simpler and more cost-effective.

• Profits over £50k–£60k: Limited company often offers tax savings and liability protection.

Is it easier to get a mortgage as a sole trader or company director?

How lenders assess sole traders

Lenders usually ask for 2–3 years of accounts, bank statements, and proof of income. Sole traders can get mortgages, but the process may involve more scrutiny.

How lenders assess directors

Limited company directors are assessed on salary, dividends, and the company’s financial stability. A strong company record can make approvals easier, especially for larger loans.

Tips for improving approval chances

• Keep thorough and accurate accounts

• Maintain clear separation between personal and business finances

• Avoid large, unexplained fluctuations in income

What are the ongoing costs of being a sole trader vs a limited company?

Annual filing costs

• Sole trader: Minimal — mainly Self Assessment.

• Limited company: Confirmation statements, annual accounts, and potentially audit costs.

Accounting fees

Limited companies often need more extensive accounting support, which increases fees. Sole traders can sometimes manage with simpler bookkeeping or basic software.

Insurance and compliance costs

Insurance is important for both structures, but limited companies may require additional policies, like directors’ liability insurance.

Is it easier to sell a business as a sole trader or limited company?

Selling goodwill as a sole trader

Sole traders sell “goodwill” — the business reputation, client list, and brand. This can be harder to value and may limit buyer interest.

Selling shares in a company

Limited companies can sell shares, providing a clear structure for transferring ownership and often achieving a higher sale price.

Tax treatment of business sales

Sole traders may pay Capital Gains Tax on sales. Company sales involve different tax implications, including potential Entrepreneurs’ Relief.

Final thoughts

There’s no one “right” choice. Sole traders enjoy simplicity, lower admin, and fewer ongoing costs — perfect for small or low-risk businesses. Limited companies offer liability protection, tax planning opportunities, and professional credibility, which benefit growing businesses.

If you’re unsure, talk to an accountant early. Planning the right structure from day one can save thousands in tax and protect your personal assets.

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