Should you set up your business as a limited company?

Sole trader vs limited company - which is best for your business_.png

Something I'm asked by almost every client I work with is "should I start a limited company?"

Hmm. I know that many US bloggers recommend setting your business up as a company as soon as humanly possible to protect yourself, but is this really necessary for UK business owners? Maybe not...

Does your business have a lot of debt?

If you buy a lot of stock or raw materials (accountant-speak for stuff you buy to make your products) on credit, or you need a business loan, it may be worth incorporating your business into a limited company.

The main benefit of a limited company is that it makes the business into its own "legal person" - meaning you are separate from your business and have limited liability, as opposed to being a sole trader, where you aren't separated from the business and have unlimited liability. And this means that should the worst happen, and your business can't pay its debts, you're protected from having your home or car from being repossessed to pay off the business's debts. You'll only lose the money you put into the business.

Most business owners I work with are based online, work from home and offer services, so they have minimal expenses as they don't need to purchase stock or rent/buy warehouse space. So if that's the kind of business you run, it probably isn't worth incorporating.

Does your business need to raise finance?

If you're seeking investment, or are planning to in the future, a limited company is the way to go. Banks and investors are much more comfortable with incorporated businesses. It's less risky, and it's easier to obtain the information they need, such as accounts and company information.

Can you manage the extra work and responsibilities?

When you're a sole trader, your responsibility is to track your income and expenses and file a Self Assessment tax return once a year. Limited companies come with a lot more work.

You'll need proper accounts, including a profit and loss account and a balance sheet, and your accounts and personal details as director of the company will be available to view publicly on Companies House.

You'll need to file a confirmation statement (which costs £13 per year) and accounts at Companies House each year, file a Corporation Tax return each year, hold a meeting and record minutes every time you make a change to the company - and if you don't do these things on time, you'll get a fine.

You'll also have to open a business bank account - you can't use your current account for limited company transactions.

Could you pay less tax?

A benefit of operating as a limited company is that you may be able to pay less tax than if you're a sole trader.

Limited companies have some different allowances and tax-deductible expenses to sole traders, which can result in a lower overall tax bill.

You can also pay yourself a salary from the business which you can claim as an expense to be deducted from your corporation tax profit, and pay yourself dividends as well, which have a lower tax rate.

Keep in mind that these tax differences won't really make much difference to you until you have a large turnover, and consider whether they're worth the extra work involved in managing a limited company.

The main thing to remember is that both sole traders and limited companies have advantages and disadvantages - consider which one works better for you and your business before making a decision.


I'm a financial coach helping female business owners to to manage their money and grow fulfilling, financially sustainable businesses. If you're ready to build a business that allows you to focus on your passions and work on your own terms, click the button below to find out how I can help you.

I also create courses and resources to help female entrepreneurs to manage their business finances.