The pros and cons of doing business as a limited company vs sole trader

When starting a business, or even as an established business on the journey of growth, choosing the most suitable legal structure is an important thing to consider. Two popular options are operating as a sole trader or forming a limited company - each of which comes with its own set of pros and cons, especially when it comes to accounts rules and tax.

In our latest blog by our Accounts Manager, Amy Daniels, we provide advice on this commonly asked question.


What are the benefits of doing business as a sole trader?

Less administration: Operating as a sole trader is straightforward and involves minimal paperwork. You have no need to register with Companies House either. So, this is an attractive option if you are looking to start a small business quickly and want to keep your administrative work to a minimum.

 Tax reporting is simpler: Tax reporting is relatively simple for sole traders. Income tax and National Insurance contributions are calculated based on the profits your business makes. The process is usually less complex than if you were dealing with company tax.


Disadvantages of doing business as a sole trader

Unlimited liability: Perhaps the most significant drawback of operating as a sole trader is that there is no legal distinction between the business and you as an owner. This means you are personally liable for any debts or legal claims against the business and means that your personal assets could be at risk.

Tax disadvantages: While the simplicity of tax reporting is a pro, it can also be a con in some cases. Sole traders may miss out on certain tax advantages available to limited companies, for instance dividend payments and more flexible salary arrangements.


What are the benefits of doing business as limited company?

Limited liability: One of the most significant advantages of forming a limited company is that your business and personal assets can be separated. Owning shares in a limited company means that your liability is limited to the amount invested in the company, and this can provide a layer of protection for your personal assets.

Tax Efficiency: Limited companies often benefit from more tax-efficient structures. For example, as an owner, you can pay yourself through a combination of salary and dividends, which may result in lower overall tax liabilities compared to sole traders, who pay income tax and national insurance on all profits


The disadvantages of trading as a limited company

Administrative burden: Limited companies are subject to more regulatory requirements and administrative tasks. This includes filing annual accounts, maintaining company records, and complying with legal obligations set out by Companies House.

Tax is more complex: While limited companies can enjoy tax advantages, navigating all the rules that relate to companies can be complex. There is usually more work to do when it comes to withdrawing money from the company, for instance you may need to set up and run a payroll to draw a salary, or to document dividend payments.


Advice on the best business structure for you

If you’re unsure which would be the best trading structure for your business whether you are starting up, or your current business is growing, our team have experience in helping many businesses reach a decision on their legal structure and we would be happy to help you. Contact us for bespoke advice, either by sending an email to with your details, or call 0161 905 1801 in our South Manchester office or 01925 830 830 in Warrington.