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Should I set up my new business as a sole trader or limited company?

sole trader or limited companyimageArticle by Elaine Clark

With many women over 50 setting up new businesses, there can often be a lot of confusion in respect to what sort of company to set up. Should you be a sole trader or set up a limited company? To help understand some of the differences, Elaine has put together some comparisons highlighting the implications of choosing one over the other.

A simple comparison to see if as a business owner you would be better off with a limited company business structure or if it would be better to trade as a sole trader / self employed business owner.

Why are you a sole trader?

Starting a business is a tough process. Maybe you decided to be a sole trader as there was less formality and paper work involved in the set up.

The decision on your appropriate business structure is not an easy one – it certainly isn’t a ‘one size fits all’ answer.

Your personal circumstances should determine your choice and only you can decide the appropriate structure.

Putting aside the misleading perception that a limited company gives you greater status or credibility then, in my opinion, there are two major issues to consider in deciding your business structure:

Limited or Unlimited Liability

As a sole trader there is no distinction between you and your business.

You do not need to have a separate business bank account.

All the debts of the business are your debts.

If the assets of the business do not cover the debts then your personal assets could be used to pay the debts – including your house!

The debts of a limited company belong to the company, which is a separate legal entity.

Except in cases where personal guarantees have been given, your personal assets will not be used to pay the debts of the company.

Maybe this is a more attractive proposition than a sole trader or unincorporated business structure.


The second reason for a limited liability business is based on tax savings.

Tax as a Sole Trader

As a sole trader you pay the following:

  • income      tax on profits over your personal allowance, assuming no other income
  • Class 2      National Insurance at £2.70 / week
  • Class 4      National Insurance on profits over £7,755 at a rate of 9% up to £41,450      and 2% thereafter

If your profits are below the personal allowance of £9,440 then in all likelihood it would be better to operate as a sole trader.

You will pay no income tax and will only pay a very small amount of class 4 national insurance if your profits are over £7,755.

If you profits are below £5,725 then you can also apply for an exemption to class 2 National Insurance.

Tax as a Limited Company

A limited company pays corporation tax at 20% on its profits (up to £300,000 where the rate rises).

Profits can be withdrawn from the company by way of a salary for the director(s) and dividends for shareholders. Again this assumes that the directors / shareholders have no other income.

So which is best?

This can be shown by an example…

Say your business has profits of £20,000

You have no other income

Tax as a sole trader would be:

Income tax (£20,000 – 9,440) at 20% = £2,112

Class 2 National Insurance (£2.70 x 52) = £140 (rounded)

Class 4 National Insurance (£20,000 – 7,755) at 9% = £1,102 (rounded)

Total tax £3,354

So profits after tax are £16,646

Tax as a limited company would be:

Pay a salary of £641 / month = £7,692

This is an allowable expense from the profit.

So the profit becomes £20,000 – 7,692 = £12,308

Corporation tax on the profit is 20% = £2,462 (rounded)

The remaining profit is distributed from the company as a dividend and no further income tax is due on the dividend as the total income is below the higher rate threshold, see here for more details:

So the total available after tax is the available profits + salary – corporation tax = £17,538

So at profits of £20,000 you would be better off as a limited company to the tune of £892.

If your profits are higher the savings may also increase!

Some may argue that this would be wiped out by an increase in accounting fees – I usually respond with “not if you are using CheapAccounting.co.uk” !

One final thing….

Sell your sole trader business to your limited company

There may be the opportunity to sell your sole trader business to your limited company.

In doing this you may realise significant tax savings.

It would be inappropriate of me to give a specific example here as the savings are absolutely dependent upon your circumstances.

So my advice is to get someone to review your circumstances and work out a specific projection for you.

You may be surprised at the result!

As always it is recommended that you get advice specific to your circumstances. The above are examples only and should not be relied upon.

Image: freedigitalphotos.net

Elaine Clark

About Elaine Clark Elaine Clark is Managing Director of the Award Winning national accountancy firm, CheapAccounting.co.uk. She was named Woman in Finance by the Network of Aspiring Women in 2011. She has made several appearances on BBC Radio 4’s Money Box with Paul Lewis and is frequently asked by newspapers, magazines and websites to provide expert comment about tax, finance and other issues relevant to small and medium-sized businesses in the UK.

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  1. Ceri Wheeldon

    March 6, 2013

    Thanks for the insights on this Elaine – I know this is a question many of us have to debate when setting up businesses – and from my own experience I know it is not always a clear cut decision to make – especially without understanding the differences between the two. An extremely helpful article.

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