Pros and Cons of Limited Company vs Sole Trader

Pros and Cons of Limited Company vs Sole Trader

You’ve made a thrilling, life-changing decision to set up your own business. Along with excitement and anticipation of an amazing journey ahead come, understandably, worrisome questions: How do I do this? What is the best way for me?! Choosing whether to go down the sole trader or a limited company route can be a daunting task.

In this blog post, we give guidance and advice to help you make the right decision.

Firstly, let’s consider the difference between a sole trader and a limited company. The main difference between the two comes down to how you are treated legally. With a limited company, the business stands as a separate entity in the eyes of the law, while with sole traders, the business owner and the business are treated as one single entity. Each of these options has its pros and cons, which I will explore further.

What does the term ‘limited company’ mean?

A ‘limited company’ is a type of business structure that is incorporated at Companies House, making it a legal ‘person’. This means that it is an entity separate from its owners, who are known as shareholders, and its managers, who are known as directors.

This separation is significant because it means the company can enter into contracts in its own name and is responsible for its own actions, finances, and liabilities. In other words, the company operates independently of the people who own and manage it.

Pros and Cons of Going Limited


The greatest benefit of forming a limited company is the limited liability protection. As mentioned above, as a director of a limited company, you are treated as a separate legal entity to your business. This means that even if the business runs into difficulty, your personal assets remain secure.

Another benefit would be the ability to do tax planning and gain tax efficiencies.  Generally, the tax bill will be much lower. This also presents the opportunity to defer the extraction of profit to a later tax year, in which a lower rate of taxation is due.

Thirdly, if you just start out, the suppliers and customers will probably take you more seriously if they see a limited company behind the business.


There are some downsides associated with limited company formation, such as:

  • More complex and time-consuming accounting requirements;
  • Not suitable for disqualified directors;
  • Costs associated with setting up a limited company.

That said, the downsides to owning and running a limited company can be far outweighed by the potential financial savings and reputational gains for your business.

What does the term ‘sole trader’ mean?

A ‘sole trader’ is a business structure where the business is owned and operated by a single individual. This individual is known as a ‘sole trader’. In this setup, the sole trader is self-employed and legally, the business and the owner are considered as one and the same entity.

This means that the sole trader is personally responsible for all aspects of the business, including its debts and losses, as well as day-to-day business decisions. The sole trader owns the business outright and does not have any partners. This allows the sole trader to have full control over the business, making all key decisions independently.

Pros and Cons of being a Sole Trader

While going limited has a number of significant benefits, setting up as a sole trader may be the right option for you, especially if you are a small business with few clients and an annual income below £20k. Pros and Cons of this structure are:


  • Relatively quick and easy to register;
  • Less accounting requirements;
  • You own all business profits and assets


  • Unlimited liability for debts and legal issues;
  • Can be more difficult to raise finance;
  • Less flexibility with regard to tax planning.


To conclude, any benefits you would receive running your business through a limited company should be considered alongside the additional time and administrative burdens this structure is likely to involve.

Firstly, do your own research to get an idea of which option might work best for you. Secondly, speak with a professional who will be able to understand all the nuances of your individual circumstances and advise on the best course of action for you.

Get in Touch

Q Accountants offer a free consultation, so if you are thinking about setting up your own business and would like to discuss the pros and cons of limited company vs sole trader, don’t hesitate to get in touch or book a discovery call.