Sole Trader or Limited Company: Which Is Right for You?

Starting your own business? One of the first big decisions is choosing between being a sole trader or setting up a limited company. We’ll break down what each option means, how they’re taxed, and help you figure out which might suit you best.

What Is a Sole Trader?

A sole trader is when you and your business are the same legal entity. You have complete control but also full responsibility. If your business faces debts or losses, your personal assets, like your home or car, could be at risk.

• Tax: As a sole trader, you pay income tax on your profits through a self-assessment tax return. Any profits above your personal allowance are taxed, and you’ll also pay National Insurance. Rates vary each year, but income tax usually ranges from 20% to 45%, while National Insurance is     between 1.85% and 8%.

What Is a Limited Company?

A limited company is a separate legal entity from you. It protects your personal assets, so if things go wrong, your personal belongings like your house are safe. You can be the sole director or have multiple directors.

• Tax: Limited companies pay corporation tax on their profits. As a director, you can pay yourself a salary and take dividends, which may be more tax-efficient than the sole trader route.

Pros and Cons: Sole Trader vs Limited Company

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What’s Better Financially?

It often depends on your income level:

• Sole Trader: If your profits are below £50,000, the simplicity and lower admin might be worth it.
• Limited Company: If you’re earning higher profits, this option can be more tax-efficient. You could take a smaller salary and dividends, which are taxed at lower rates, and corporation tax is usually lower than income tax.

Will You Have More Than One Source of Income?

If you have income from other sources—such as rental properties, a full-time job, pensions, or any other income stream—this can complicate your financial situation. Different income types have different tax implications, and managing them all under one structure can be tricky. In this case, it’s wise to consult our experts to find the best solution for you. Contact our team here to get personalized advice.

Other Things to Consider

• Flexibility: Sole traders have full control but also full responsibility. It’s a straightforward way to start with less admin.
• Professional Image: A limited company can look more professional to clients, potentially helping you secure bigger contracts.
• Future Growth: If you’re planning to grow or seek investment, a limited company structure supports that expansion better.

Still Unsure?

Starting as a sole trader can be a good, low-cost option with less paperwork and more flexibility. You can easily switch to a limited company when your business grows. With the right accountant, you’ll know exactly when the time is right.

Conclusion

There’s no one-size-fits-all answer. Think about your goals, income, and risk tolerance. Remember, you can start as a sole trader and switch to a limited company later as your business evolves.

Need Help Setting Up?

At Blue Rocket Accounting, we specialize in supporting start-ups. Our team offers unlimited advice to help you choose the best structure and guide you every step of the way. Ready for a tailored conversation? Get in touch with us using the details on our contact page.

Want to Learn More About Start-Ups?

Check out more of our blogs here.

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What Are the Requirements of a UK Ltd Company?

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