Choose between forming your own limited company, or becoming self-employed (a sole trader), with the help of our comprehensive comparison table, which describes the advantages and disadvantages of each business structure. Here is the table of Sole Trader Vs Limited Company.
| Limited | Sole Trader | |
|---|---|---|
| Legal Entity | The company is an entirely separate legal entity from its owners. | The business and its owners are treated as one entity. |
| Set-up Costs | You can form your company for under £100 | No set-up costs |
| Tax Efficiency | The limited company route remains the most tax-efficient, despite higher dividend taxes from April 2016. | Less tax efficient, although the gap will narrow from April 2016. |
| Which business taxes? | The company pays Corporation Tax @ 20% on all business profits. | The business and its owner are treated as one for tax income purposes, which is calculated at self-assessment time. |
| Which personal taxes? | Company shareholders/directors pay tax on any dividends they receive, and income tax on any salaries. | See above. |
| National Insurance | Company pays employers' Class 1 NICs on salaries, staff pay employees' Class 1 NICs on salaries | You pay Class 2 and Class 4 NICs. |
| Ease of Starting | Form a company in a matter of hours, some admin to set yourself up in business. | Very simple, start right away and inform HMRC by 5th Oct of your business' second tax year. |
| Administration | A certain amount of paperwork required, e.g. dealing with Companies House. Almost all can be completed via an accountant. | Little ongoing paperwork, no dealings with Companies House. |
| Image | You may benefit from the professional image having a company may provide, particularly in professional services. | The most popular business structure, but may not be ideal in some professions. |
| Legal Status | Your personal liability is limited should something go wrong with your business. | Your personal liability is unlimited. |
| Shareholdings | Owners have shares in the business, which are easier to document and trade/sell in the future. | It may be less straightforward to create/change shares in a self-employed business. |
| Contracting? | Limited company (or umbrella) are the two realistic options. | Recruiters will not work with contractors who are sole traders as they may inherit liabilities. |
| Privacy | Company details are on the public record (although you can provide a 'service address' instead of your own for directors' details). | Your information is not held on the public record. |
| Financing | Tends to be easier to source as a limited company owner, as company details are more transparent. | Less easy to secure loans as a self-employed business. |
| Tax Planning | Options are much broader, e.g. choosing to delay dividends until a future tax year to minimise tax liability. | Less tax planning via the self-assessment system. |
| Accountancy Costs | Usually higher for limited companies, although fixed monthly/annual fees can be competitive. | Tend to be lower, and accounting simpler, so you may not need accountancy help at all. |
For more information, try our dedicated article to choosing between the incorporated and self-employed routes.
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