Sole trader or limited company: your quick guide to the pros and cons

This is potentially one of the trickiest decisions you’re going to have to make as you embark upon a career of self-employment, not least because of the sheer volume of information you’ll find if you Google ‘sole trader or limited company’.

There are certainly advantages and disadvantages to either model and once you start researching you’ll soon find yourself lost down a rabbit hole of legislation and regulation. While it is an important decision worth taking time over, sometimes you just need to climb out of the rabbit hole and have a quick overview.

So read on for our nutshell version of which business model may be right for you.

Consider operating as a sole trader if:

1. You’re looking for the easier option

Not that running a busy is ever easy but working as a sole trader is definitely the simplest way of getting started. There are fewer rules and regulations to deal with and to start trading you just have to choose a suitable name for your business (working under your own name is fine too), inform HMRC that you’re self-employed, and ensure you’re set up for paying national insurance contributions. This is great if you’ve started trading as a trial run and you aren’t sure if your business has a secure future.

2. You’re willing to invest in appropriate business insurance

As a sole trader, you don’t have a company to hide behind. Any debts, financial losses or angry, litigious customers are your responsibility and yours alone. If you are sued and uninsured, it’s your own personal finances that will take the hit.

3. You’d rather not make your accounts public

Your only responsibility accounts-wise is to make sure you’re keeping accurate records and paying the right amount of income tax.

4. You want easy access to your business funds

Provided you save enough to cover your annual tax bill (it’s a good idea to set aside a monthly payment to ensure you don’t get caught short), you are free to dip in and out of your business funds as necessary, without implications. Limited companies have a few more hoops to jump through.

Considering forming a limited company if:

1. You’re not just dabbling in the world of self-employment

Setting up a limited company can be a complicated procedure so you want to be sure that you have a viable business plan and you’re not going to be tempted to give up in six months time when the going gets tough. You have to be willing and able to accept the additional regulations and paperwork that goes along with being a limited company, like dealing with Companies House and making your accounts public.

2. You have the money to invest in a great accountant

Limited company accounts are more complex than those of a sole trader so you will need to enlist the help of a professional to ensure you’re submitting accurate financial records.

3. You’re looking for an additional layer of protection

Unlike sole traders, with a limited company, you’re considered a separate entity from the business. Any debts or losses belong to the business and our litigious client from earlier is now suing the company rather than you personally.

Once you’ve registered your company name with Companies House, it is also protected from anyone trying to copy it.

4. You’re planning ahead — and dreaming big

As a limited company, it can be far easier to secure finance for planned business expansion and, when the time comes, it’s also simpler to transfer ownership of a limited company. Owners of limited companies also have access to superior pension deals so it really can be worth thinking ahead.

Whichever path you think might be right for you, Countingup has you covered.

Our business accounts and accounting software have been designed specifically for the kinds of businesses that drive the economy. From the smallest sole trader right up to the larger, rapidly-growing limited companies — and everything in between.

Whether you’re tearing your hair out over trying to open a business bank account in the first place, or you’re sick of the working hours wasted trying to keep up with your bookkeeping, Countingup can help. Sign up for free today.