Small-business owners often ask us whether they should start up as a sole trader or a Limited Company. Here’s our advice.

Running a business is all about making good decisions. And one of the first things you’ll need to decide is how to begin; will you operate as a sole trader, or establish yourself as a limited company?

There are more implications to this choice than you might expect. So first of all, let’s get into the three excellent reasons why you might want to create your very own limited company.

3 Great reasons to form a limited company


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If you were looking for an established firm of accountants you could trust, who would you rather work with, PKB Accountants Limited or Andy Penfold? If you’d feel more comfortable working with PKB Ltd, you’re not alone! Most of us unconsciously give more credibility to a business with “Ltd” in its name, as it just feels safer and more dependable.So, if you need potential customers to trust you, consider going Limited.  It’s not all about status, either — many organisations (for example, councils) can refuse to work with sole traders.

Resale Value

When you look into the future, do you visualise building up your business into a profitable concern that you’ll eventually sell? If so, Limited could be the best way to go. Sole traders can (and do!) build up profitable businesses, but they often find it hard to sell them on later, as there is no tangible company, just goodwill and a customer base.


Every time your business works for someone else, you’re at risk. The wedding cake you baked might cause food poisoning, the extension you build might collapse… There’s no work without risk. Even if you have excellent public liability insurance, you won’t be covered if you’re ever found to be at fault. As a sole trader, all your assets can be pillaged for damages, from your home, to your life savings. But as a Limited company, only money belonging specifically to your business can be used to pay damages. Your risks are, literally, limited.

Those are the three main reasons to create a Limited Company. Now let’s discuss the five main reasons not to!


5 great reasons to be a Sole Trader


Start Up Costs

There are no start-up costs when you begin work as a Sole Trader (barring the cost             of the call to HMRC to let them know you’re self-employed!). You can simply begin.

When you start up a Limited Company, there are several costs:

  • A full check at Companies House to ensure your desired business name is available;
  • Establishing a registered office address;
  • Financial advice on setting up shares, dividends and payroll.

An experienced firm of accountants can help you jump painlessly through these                  endless hoops of red-tape, but you’ll likely have to pay between £200 and £400                 just to become set up.


As we’ve just mentioned, your business name has to follow strict regulations. It must be unique, it can’t be offensive (no “Nice Buns” bakeries!), and it can’t imply any sort of Royal connection.

To get an idea how strictly these rules are enforced, we once helped a local business open a delicatessen. They wanted to call their shop “Duke’s Deli”, because of the name of the road it was situated on. They were strictly forbidden, because “Duke’s” suggested a Royal warrant. Very strict!

As a sole trader, you are under much less pressure. You can’t steal someone else’s name, or closely copy the name of another business. But even if you do make any mistakes, your chances of being found out are much smaller.


When you’re a sole trader, paying yourself is simple: your bank account belongs to you, so you can dip into it any time. Simples! When you’re a Limited Company, the business bank accounts belong strictly to the business. To access your money, you’ll need to follow strict procedures. One of these is payroll: you will have to complete a full salary payroll each month, even if you’re the only person being paid.

There are ways you can do payroll for free online, and we’d be happy to advise you. If you’d prefer an accountant to do it for you to ensure everything is correct, your monthly cost (for up to 5 employees) will be around £25 per month.


You’ve had a great year, and you want to celebrate by taking your family away for Christmas. As a sole trader, you book flights and hotels and just go. As a Limited Company, you will have to withdraw the money from your business. If you award yourself a bonus in your monthly salary, you’ll be liable for extra tax and National Insurance. The only tax-free way to enjoy your profits is to issue yourself a dividend. You’re allowed to issue yourself one dividend of up to £2,000 a year with no tax implications.

Issuing a dividend is another thorny financial task, as you’ll have to get agreement from all your shareholders. Even if that’s just you and the cat, you’ll have to follow procedure.


As your accountant, we can explore opportunities to create a more efficient Tax Package for a Limited Company, easier than we can for a Sole Trader.

Are you all clear now? Don’t worry if you’re not! This is one of the first decisions you’ll need to make, but that doesn’t make it an easy one. If you’d like to discuss the best options for you, please make an appointment to talk about this with one of our friendly team.

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