The Sole Trader or the Limited Company

young entrepreneurs



I did ponder long and hard about the difference between the two and what one would suit me and my business. Yes, I admit Google did become my best friend - for quite a few things in fact. So let's make this simpler than my rocket science approach to figuring where I wanted to take my business. 

Let's go...


Sole Trader

‘A person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid, but liable for all losses’

Being a sole trader is just another word for ‘self employed’. You will be accountable for all the financial risks incurred by the business – which means you will be liable to repay any debts belonging to the business should it fail. Most sole traders choose to go for businesses that won’t typically generate too much debt over the time it is operational.


Advantages of being a sole trader

Getting your sole trader business up and running is fast and easy to implement with no registration costs. You will have the opportunity to hire people or become a limited company at a later date. Although it is easy to get set up as a sole trader, some businesses may require a license or permit from their local authority – this depends on the type of business you choose.


Getting started as a sole trader

To begin trading as a trader you will need to register your business with HM Revenue & Customs as soon as you get up and running. Failing to do this may result in a fine of 100% of the tax due in addition to the amount of unpaid tax. This will still stand even if you run your business on a part-time basis.

It is very common to start your business off on a part-time basis, while you continue full-time employment. This allows you to not only test the water, but to have a steady flow of capital you can put directly into your startup. If you choose to take this route, you will have to register with HMRC, this will indicate to them that your status has changed and you are self-employed for some if your work.



Getting registered is quick and easy just give HMRC ‘Newly Self-Employed Helpline’ line a call on 0300 200 3504 or use their HMRC Online Service. To do this you will need:

• Your Name
• Date of birth
• Address
• Phone Number
• N.I Number
• Start date
• Type of business
• Whether you are a sole trader or working with a partner

HMRC has a very cool e-learning tutorial to help you get to grips with all the various aspects of the system, this way you can take your time to evolve your knowledge and certainly reduce any confusion that this may cause.


A limited company

Setting up as limited company is likely to cost a little bit more than if you started trading as a sole trader. The obvious difference will certainly be down to the finance involved in getting a limited company registered. If you are a sole trader and your business fails you will be liable for any debts associated with the business. Potentially you will risk going into bankruptcy if the debts are high and you cannot make the accepted repayments.

Operating as a limited company means you will protect yourself from the liability issues involved with being a sole trader. A limited company operates as a separate legal entity – this means it takes full responsibility for all actions.

A private limited company can have one or more shareholders – these shares cannot be sold separately, for example on the stock market. Whereas, public limited companies can do this if they wish to. As a director of a limited company, your only risk if your business fails will be the investment you put into the business. However, if you decide to apply for bank loans to put into the business and processed it as a guarantor; you will be liable for the debt if your business experiences financial difficulties.

Being a private limited company will in some cases make your business more appealing to your potential customers, partners or potential customers.


How do you set up your limited company

To get started, you will first need to register online at Companies House. Another option will be to pay an accountant, agent or solicitor to complete this process for you. To complete your registration all you will need are a few basic information about yourself and a few signatures – then you are on your way!

A very interesting option will be to purchase a ready-made limited company name.

Should you want to form a brand new limited company, you must firstly send a memorandum of association, articles of association and a completed IN01 form to Companies House.
A memorandum of association simply details the limited companies name, registered office and the nature of your business. This memorandum must be signed by the director or directors in front of a witness. Your registered office will be where you operate your limited company – this is the address Companies House will send you all notices, invoices and reminders. The articles of association you will need to supply will set out the rules for the day to day running and regulation of your company.



Unfortunately, Companies House does not supply memorandums and articles, but these can be bought from a legal stationer or company-formation agent.


Private limited company director

The director of a private limited company has to appoint at least one director – this director can also be a shareholder in the limited company. It will not be possible to appoint a director who has been disqualified from acting as a limited company director – or if they have been undischarged bankrupt or under 16 years of age.

At present, private limited companies no longer have to appoint a company secretary. As the director of a limited company you will be responsible for notifying Companies House of any changes to your business – including changes in management and structure.

You will need to file accounts with Companies House each year before the requested date – should you fail to do this, you will receive a fine. In certain circumstances your company may be exempt, but your accounts will need to be audited annually. A good idea will be to hire an accountant, as you will need to inform HM Revenue & Customs, by means of an annual return, of any taxable income or profits.

All company directors in your company are employees of the company and must pay income tax and Class 1 National Insurance contributions.

Deciding whether to operate as sole trader or a limited company will come down to your personal choice. A sole trader will of course be liable for all the issues (if any) associated within their business. This startup business will operate as an extension of yourself – if it fails you will have to foot the bill. Most people do choose to run their business as a private limited company as it allows them to separate themselves from the financial burden associated with the process. In essence a limited company is a living entity, so the owner will not responsible for any debts incurred by the business. Always take your time to make your decision as both options carry their own responsibilities.