Introduction

Small and medium sized businesses make up a vast majority of all businesses in the United Kingdom. Despite their vast network, small businesses were also the most affected in the previous two years’ post pandemic slump. With 2023 on the horizon, if you plan on starting a business yourself, it is essential that you have all your ducks in a row. This includes making the most critical business decision-incorporating your company as a sole trader business or limited liability company, early. Cost-saving is a small business’s biggest challenge along with surviving economic downturns. This makes the decision regarding how to structure your company the most important one. To make it easy for you, we have provided a guide that underlines the disadvantages and advantages of both a sole trader and limited liability company with a specific focus on tax saving. Please read on.

Sole Trader & Limited Liability Company Defined

Sole Trader as the name suggests is a business run by usually one self-employed person with all business risks and liabilities incurred by the one person. Conversely, all profits earned by the business lie in the hands of one person as well. From a legal perspective, in case of sole traders, there is no distinction between the business and owner. For example, in case of lawsuit against the business, a sole trader’s assets will be considered the business’s assets for settling any debts. A big perk however, in the case of a sole trading business is the limited number of legal formalities to be incurred. There are fewer reporting requirements as well which in turns leads to cost savings.

According to the United Kingdom Companies Act 2006, a limited liability company is defined as a company where the liability of members is limited. Further, such limitation will be clearly defined in the company’s constitution. Shareholders may limit their liability based on the number of shares they hold or the specific guarantees they make. As this makes clear, unlike a sole trading business, a limited liability company is seen as distinct from its members. A limited liability company’s business assets and debts are separate from the personal debts of its shareholders and directors. A limited liability company is also mandated to comply with several legal obligations. For instances, directors of a limited liability company must mandatorily follow rules set in the Articles of Association, maintain company records and report any changes and file company tax return.

How to choose between Sole Proprietorship or Limited Liability Company structure of business?

Deciding between operating as a sole trader or limited liability company (LTD) structure depends greatly on your personal circumstances. Some key considerations include your finances, availability of ready partners, capacity for risk taking and future plans for expansion–if any, type of business, scale and geographical extent of operations.

To make it easier, we’ve also outlined some important advantages and disadvantages of both types of business to guide you.

Advantages of Sole Trading Business

Ease of doing Business- With a sole trading business, you can begin almost immediately. As there are no registration requirements applicable to a sole trading business, you are not obligated to wait for a go ahead. In addition, there is limited paperwork to be file as a sole trader. Aside, from personal tax return, your business obligations from a legal and regulatory standpoint are limited.

Ease of Decision Making-As a sole proprietor, you are answerable to only yourself. This means you can resolve critical or every day business issues and decisions without consulting partners, directors or shareholders. Decisions like taking a loan, looking for investment or changing business direction can be made quickly.

Privacy and Autonomy in Business– Unlike in the case of a company, your and your business’s finances are not subject to public or regulatory scrutiny. You do not have to worry about maintaining a public image or opinion, although this should not be ignored.

Disadvantages of Sole Trading Business

Financial Hurdles- As a sole trading business, your business finances come from one person-YOU. Therefore, if you decide to expand, your choices become limited. You may be forced to take on a loan from a lender and may be limited in the size of loan you can get. Repaying the loan is also your responsibility.

Unlimited Liability- As previously mentioned, there is no distinction between a sole trader and his business. This means that you are solely responsible for repaying any and all debts of your business. Assets such as your house or car as a result are in danger of being used to pay off said debts which is a big risk.

Fewer Tax Saving Options- Sole traders have bigger income tax obligations compared to the corporation tax paid by a limited liability company. In addition, sole traders have to pay national insurance on their profits. Of course with the government recently increasing the corporation tax rate we would advice to seek professional advice on your circumstances to make sure you are setup in the best possible way for tax saving.

Limited IP Protection & Credibility- As a sole trader, if you decide to operate the business in your own name as many businesses do, you will not receive legal protection. This means the associated goodwill from the intellectual property of your name can easily be misused by someone trading in the same name. If your business becomes successful and depending on the scale of your business, this can result in big losses for you or poor image if another company uses your trading name and gets negative publicity.

Advantages of Limited Liability Company 

Limited liability- The biggest advantage of operating your business as a limited liability business is the distinction between your company and business. This ensures that you as a director or shareholder are not directly responsible for the debts incurred by your company. You may also be protected in case of lawsuits filed against your company in some cases. Your personal assets cannot be used to settle business debts.

Public Image- As a company, certain suppliers and customers will take you more seriously, especially if you have been established for some years with positive reviews and credit history. You can also mask the size of your company by registering voluntarily for VAT. For potential customers they will think you are a successful business with over £85,000 (threshold for registering for VAT) in turnover.

More Tax Friendly- A limited liability company’s tax liability is smaller compared to a sole trading business. Further, they can readily access tax allowances on the basis of the scale of their operations.

Disadvantages of Limited Liability Company 

Complex Structuring Process- Setting up a business as a limited liability company involves more complex formalities and filings. Before beginning operators, the company must be registered with the companies house. Once you do begin operations, filing obligations will be involved in the form of employment contracts, shareholder agreements, tax returns, confirmation statements, annual accounts, etc.


Less Privacy- As a limited company, the many regulatory requirements mean that your business is always open to scrutiny. Your company documents and the health of your company will be open for discussion and you are in no control of your public image. Depending on the kind of business you run, this will involve risk of maintaining goodwill in case of any business controversies.

It’s important to get specialist advice when making the crucial first step of structuring your business. At Finanche Limited, our specialty is small and medium sized businesses and we can provide you end to end support in setting up accounts.