Sole Trader vs Limited company

Common questions when deciding which business structure to choose


When setting up a business, it’s vital to weigh up the differences between sole trader and limited company, as the structure you choose impacts everything, from your profits to how much paperwork you do.


We answer some of the most frequently asked questions regarding how to structure your business.


Q. Can I go from from being a sole trader to limited company?


Yes, you can and it’s pretty easy to do so through Companies House. Alternatively, this is bread and butter stuff for accountants and they can incorporate your business on your behalf. This can be a complex issue depending on how you want to set the company up, so it’s always worth asking.


Q. What are the benefits of operating as a limited company over a sole trader?


Most entrepreneurs and prospective business owners choose to set up a limited company over being a sole trader because a limited company is a separate legal entity from its directors. Essentially, what this form of structure offers is limited liability and protection to personal assets should the business fail. Equally, for limited companies, there are tax savings, greater borrowing power, improved reputation and credibility.


Q. Can you change from a limited company to a sole trader?


Whilst this is rare, it is possible. If for example you’re looking to downsize or simplify your business, you might choose to go from being a limited company to a sole trader. Whereas with a limited company there is typically a lot more admin and more legal obligations to adhere to, setting up as a sole trader offers a far simpler business structure. If you’re considering going down this route, it’s worth considering using an accountant to ensure the limited company is closed down properly, not least because there are considerable tax matters to address, in particular capital gains tax.


Q. Can you be a sole trader and limited company at the same time?


You can be, but you will need to prove to HMRC that the businesses operate separately and you are not using the arrangement purely to avoid tax, eg. to get around being VAT registered for one of the businesses.