Last Updated on 30/09/2025 by Adrian Lamb
Back to school and back to work – now is a good time to establish your business.
O’Boyle Accounting & Taxation is a ‘small business’ Accountant in 4 Bingham St, Bangor, Northern Ireland. Most of our clients run small businesses so we understand what’s important to help you grow your venture. We look after companies in Bangor, Newtownards, North Down and further afield.
When you’re self-employed, there are pros and cons to setting yourself up as a sole trader or a limited company – but how does it compare in terms of cash? The two are taxed differently, so it makes a difference to the pounds in your pocket.
When starting a business, one of the first big decisions you’ll make is whether you’ll be a sole trader or a limited company. These are the two most common ways to run a business in the UK, and they’ll affect everything from taxes and rules to hiring and firing. In this article, we’ll break down the pros and cons of each so you can make an informed choice.
What are the important differences between sole traders and limited companies?
The main difference between a sole trader and a limited company is who owns it. A sole trader is owned and controlled by one person, and they’re personally liable for any debts the business has. In contrast, a limited company’s ownership is limited by shares.
The shareholders of limited companies have “limited liability,” which means they’re not personally responsible for the company’s debts. This means that if the company goes bankrupt, the shareholders’ personal assets are usually protected.
In summary, when you run a limited company, your liability usually doesn’t go beyond what the company has promised. Your creditors can’t hold you personally responsible for the company’s actions unless you offer personal guarantees.
Advantages of being a limited company?
- Selling up or moving on is simpler. Prospective buyers might prefer buying a company. Their accountants can analyse performance based on Companies House accounts. All assets, liabilities, and charges against assets are visible.
- Limited liability protects your assets from the company’s liabilities, unless you personally guarantee creditors or your bank.
- Limited company owners aren’t responsible for debts and losses unless they act recklessly or illegally.
- Limited company owners can pay themselves a combination of dividends and salary. Dividends have a lower tax threshold, making tax more efficient.
Disadvantages of a limited company
- Financial Administration: Limited companies must file corporation tax returns, annual accounts, and confirmation statements. Self-employed sole traders must file self-assessment tax returns.
- Taxation: Limited companies offset losses against profits, while self-employed sole traders may only partially compensate for losses to reduce income tax. Specialist tax advice from an accountant is recommended.
- Annual Accounts: Limited companies must file annual accounts at Companies House, while sole traders don’t have this obligation.
Advantages of being a sole trader?
Starting a business as a sole trader is a breeze and super affordable. You don’t have to deal with all that paperwork beyond your Self-Assessment tax return. No need to worry about incorporating a company and filing annual accounts, confirmation statements, and company tax returns every year. You can gain advantages of saving tax by working with a good accountant such as ourselves. You don’t have to explain how you spend your earnings or take on the legal responsibilities of being a company director. Plus, you can keep your company details and office address private, unlike companies registered with Companies House.
- Profits are yours after tax – As the single owner of your business, you’ll get to keep 100% of your after-tax profits.
- Less admin needed – Submit your year-end self-assessment tax return legally. Many accountancy software packages can help. You don’t need to prepare or file accounts.
- Easy start-up process – Fewer rules apply as a self-employed sole trader. Register online, get a unique tax reference (UTR) number, and pay taxes annually.
- Ultimate decision-maker – Sole traders have complete control and decision-making power; you don’t need anyone’s approval.
Disadvantages of a sole trader
- Responsibility: As a sole trader, you’re responsible for every aspect of your business, including tax, employment rules, customers, planning, and strategy. This responsibility grows as you employ people and expand.
- Liability: You’re personally liable for your business debts. If your business fails, you’ll lose everything, including your home, savings, and assets.
- Capital Raising: Sole traders usually start with savings or family funding or get a personal bank loan. If the loan is above a certain amount or you have limited experience, a lender may ask for your home as collateral.
Which is better, sole trader or limited company?
The pros and cons are listed above. Your decision depends on your preferences, ambitions, and options. There’s no right or wrong choice.
