Limited Company or Sole Trader: Which is better for you?

Limited Company

One thing every contractor has to decide is which legal structure to use. The simplest choice is to operate as a sole trader, which is probably why there are an estimated 3.4 million sole traders operating in the UK. The limited company option is also popular, with an estimated 1.9 million operating today in the UK. So, what’s the difference between these two options, and which is better for your contracting business?

Guide to Opening and Running Your Own Limited Company: Click here to download>>

What is a Sole Trader?

A sole trader is simply a self-employed person who is the sole owner of their business. You can set this kind of business up in a few minutes on the GOV.UK website, and there’s relatively little paperwork apart from an annual self-assessment tax return.

What is a Limited Company?

A limited company has its own legal identity, separate from its directors and shareholders. This is still true even if the company is owned and run by just one person. It’s a little more complex to set up, and involves a little more paperwork, but it has a number of important advantages.

You might consider setting up a limited company if:

You’re taking a financial risk

As a sole trader, there is no legal separation between you and your business, which means there’s no limit to your liability and your personal assets could be at risk if it goes wrong.

Because a limited company is a separate legal entity, your personal assets are not exposed, and you’re only risking what you put into the company.

You could reduce your tax bill

Generally speaking, trading through a limited company is more tax efficient, meaning you can expect to take home more of your profits. Once you reach a certain level of earnings it makes a significant difference, particularly if you have a good contractor accountant to advise you.

You could claim a wider range of expenses

On the subject of reducing your tax bill, a limited company can claim a wider range of allowances and costs against its profits, and depending on your business and the expenses you incur, this could also make a big difference.

It could help you build your business

In some industries, your clients and customers might be more comfortable dealing with limited companies. It can reassure them that you’re a serious business, that you know what you’re doing and that you’ll still be available when they need you again. In this kind of environment, operating as a sole trader can limit your opportunities, and “going limited” is an obvious choice.

Contracting is a long-term career choice

If you think contracting might be a short-term stop-gap between permanent roles, or you’re not sure if it’s for you, it might not be worth going to the trouble of forming a limited company. However, for long-term contractors who want to build their brand and their business, it’s often the best way to go.

You’re in business in your own right

When you talk to your accountant about going limited, one of the things they’ll discuss is whether you’re likely to fall “inside” or “outside” IR35. This is one of many reasons why it’s important to engage a specialist contractor accountant, as many high-street accountants don’t have an in-depth knowledge of IR35.

This is legislation concerned with whether you’re a so called “disguised employee”, or whether you’re genuinely in business for yourself, based on your relationship with your end client. Being inside IR35 can negate some of the advantages of trading through a limited company. Download our guide to IR35 for more information.

Isn’t running a limited company a lot of work?

There is a little more work involved in running a limited company, but a good contractor accountant will cover most of it for you, as well as providing expert advice to help you maximise the rewards of contracting.

If you have any questions of if we can help in any way, please contact our expert team on 01296 468 483 or email

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