Sole Trader Or Limited Company – What’s The Difference?

If you are currently a freelancer or sole trader but have found your business is growing rapidly, you might be considering whether or not to set up as a limited company. There are many reasons why choosing to become a limited Company may benefit you.
My own experience was that as a self employed management trainer, the size of the companies I could work with was limited to small to medium sized businesses as the large companies require anyone who supplies them, to go through their procurement process. In every case that process required that you are as supplier, a Limited Company.

For me it was not a financial decision initially but a requirement to help me grow my business despite the fact that it was just me. For you it might be a financial or a safety choice from the off but as any company grows the Limited Company will become a financial necessity eventually.
So Sole Trader or Limited Company and what is the difference between the two?
Sole Trader Or Limited Company - What’s The Difference?

Paying Taxes

If you are already freelance, you should already be paying income tax on your earnings, between 20% – 45% in the U.K, depending on your income. You should also be used to paying NICs, either as a flat rate or as a percentage of your profits. Hopefully, you are already up on how taxes work, and submitting your tax return every year to arrange your bill. This bill is generally due by the 31st January of the following year.
If you decide to register a limited company, with someone like Your Company Formations Limited, your profits will be subject to corporation tax. You will become a Director and as such, you can pay yourself a salary below your personal tax threshold, and take other company profits in dividends which are tax free up to £5000.
As with freelancing as a sole trader, you can still make business purchases which are tax deductible. You could eventually hire an in-house finance manager to manage all the tricky tax bits for you but you will definitely need an accountant to help you with the taxes, as filing as a company is a little more complicated than handling your finances as a freelancer.

The Law

Your legal status will change if you decide to make the leap to a limited company. As a freelancer, you are your business, with no legal separation. If you decide to register a company with companies house, you and your company will become separate legal entities.
As a freelancer, you will know that currently if something goes wrong in your business, you are the one held solely personally and financially responsible. If you become a company director, the company is responsible. This would mean that you and any shareholders would not be responsible for any company debts, beyond your personal investment. If the company went bankrupt, your personal finances are safe. If you went bankrupt as a freelancer, you don’t have this separation and it would be you personally that goes bankrupt!
There are always risks with any business, but company directors do have some more built in protection with a limited company. You’ll already be aware of the financial risks of freelancing, but with sole trader insurance and some money savvy, you can protect yourself from disaster if you decide the limited company route is not for you.


Whether you choose to remain freelance, or change to a limited company, you can bring in an employee to help you with your business.
Hiring your first employee works in much the same way, whether you are a limited company or not. First, you will need to register as an employer with HMRC. Next, your new employee will need to be given a written statement of employment which should clearly explain all of the terms of their employment.
You will need to set up some kind of payroll, so you and your staff member pay PAYE taxes. You will also need to enroll employees in a workplace pension scheme, and maybe offer work benefits. Whether you take on staff as a freelancer or as a limited company, your responsibilities as an employer remain exactly the same.

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Final Thoughts

There are many benefits of becoming a limited company but it will create some initial work in registering and will require you to have an accountant that can sign off your accounts legally.
Think hard about your choice of Sole Trader or Limited Company so you can make an informed choice and not a rash one.
If you have found this post useful then please do me a favour and give it a share on your favourite social media platform. Sharing is Caring.
As ever if you have any questions or want to share your own thoughts or experiences, please leave a comment below and I will get back to you as soon as I can.
With Grace and Gratitude
Please be aware that this post may contain affiliate links which means that if you click on one and then make a purchase, I will earn a commission but it will not cost you any more.
I hope that you have found this article helpful, and will use this advice to make sure that your business has everything it needs to succeed.
Sole Trader Or Limited Company - What’s The Difference?

1 Comment

  1. Kristina


    Great article!

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