Limited Company Vs. Sole Trader

Sole trader is the simplest business structure. As a sole trader, you run the business as an individual and you can keep all the profits after you have paid tax on them.

Limited company is another kind of business organization which runs by an appointed director. The company is owned by its ‘members’ usually shareholders. Starting up a business as limited company involves a more complex process which with greater financial and administrative responsibilities. However, there are many advantages a limited company has over a self-employed entity.


Sole trader has unlimited liability over business debt. A sole trader is treated as single entity for tax and administrative purposes, and usually suffers high risks.

However, a limited company is a completely separated entity from its owners. The members (shareholders) will not be personally liable for any financial losses made by the company. The investors only liable for debts to the amount they have invested in the company.

Tax efficiency

The main advantage of running your business as a limited company is that you are likely to pay less personal tax than a sole trader.

Limited company profits are subject to Corporation Tax, which currently set at 20%. Unlike the sole trader route, a limited company can retain profits and distribute them as dividends to future tax years if necessary.

The shareholder who appointed as director of a limited company, may choose to take a lower salary and draw most of his income in the form of dividends. By doing this the director can minimize the amount of National Insurance Contributions (NICs) , because dividends are taxed separately and not subject to NICs.

As a sole trader, your entire income is subject to NIC rules. Running your business as a limited company could therefore improve tax efficiency.


Sole trader is always operated with limited funds. Limited company has stronger borrowing capacity and more opportunities to raise capital.

Public image

Limited company provides more professional image to the public, as it is regulated by stricter statutory requirement and obliged to display more company information. All these will contribute to public confidence of the company.


Once the name of a limited company has been registered in Companies House, it is protected by law.

Human resource

Limited company provides better working condition and benefit to employees. It can attract and retain high-caliber employees.


The above information and calculations are for illustrative purposes only. No liability is accepted by O’Brien S & Co Ltd for any actions or losses from investment in reliance on the information and calculations. Consult a qualified professional financial advisor before making any financial decisions. O’Brien S & Co Ltd holds the copyrights in all materials on the website. All rights reserved.

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