Changing to a Sole Trade?

In the UK entrepreneurs often find themselves grappling with the decision of whether to change the structure and legal status of their business. This may entail adapting your business from a limited company to a sole trade. This blog helps to explain what each of them are. We will also explore the pros and cons of being a Limited Company and a Sole Trade to help you arrive at a conclusion.

 The Dynamic Business Landscape

Small enterprises and self-employed tradespeople may prefer the simplicity and control over earnings offered by sole trading. While those with ambitions of starting a larger company with lots of employees might be tempted by the security that registering as a limited company offers. But this is not always the case.

Switching to a sole trade company can increase flexibility into your life and cope with the demands of people wanting to move towards flexible working. In addition, it can help you manage external admin and give you potential tax benefits.


Key Facts

At the start of 2023, there were 5.5 million businesses in the private sector. Of these 1.4 million had employees, and 4.2 million had no employees, which means roughly 75% of businesses didn’t employ a single person. (Data extracted from Money.co.uk)

Even though many people are drifting towards becoming a sole trader, being a limited company might be the best approach for you and your business. Being a sole trade remains the most popular option for the small business owner, however there are clear benefits and advantages of having a limited company.

Becoming a limited company can protect owners from these risks by giving them limited liability. But it can also mean a lot more admin and fiduciary duties for the directors.

For many smaller businesses or self-employed tradespeople, being a sole trader offers a few financial advantages. It also brings an increased level of risk.

The structure you choose can have an impact on almost every aspect of your business. This includes how much tax you will pay and what earnings you can make. Furthermore, what happens should your company get into difficulty.

What might work for one company will not necessarily work for another. So, it’s essential that you weigh up the pros and cons of both and make an informed choice.



Sole Trade

A sole trader is a self-employed person with full ownership of their business. It does not have a separate legal identity from that of the owner. That means that a sole trader takes full liability.

To become a sole trader, you must register using the government portal within three months of founding your business.

A Limited Liability Company

A limited liability company is one which is legally distinct from the identity of the owner. It has a unique company identity, which must be registered (for a small fee) with Companies House.

Because of this, there may be more than one owner or director, and they will have limited liability — meaning their personal finances won’t be affected should the business struggle financially.


Key Considerations


Here all the risk lies with the Sole trader. If you want to operate as a sole trader, you will be completely responsible for your business and its finances. As a sole trader, the business owner and the business are treated as one entity. However, with a limited company the business itself is a separate entity in the eyes of the law.

If you are a sole trader then you will need to make sure that you have various different small business insurance policies in place to avoid getting sued personally. As in the eyes of the law, you and your business are the same, without insurance, you could be sued personally.

If you have business debts as a sole trader or your business goes bust your personal finances and assets are in danger. This is because legally there is no difference between your assets and the business’ assets.


 Sole traders keep all of their earnings after tax, which is paid via the self-assessment system. This means that your earnings are entirely dependent on your performance that year. So while there’s the potential for large profits, there’s also the risk that you won’t make enough money to earn a decent salary.

The owners of a limited company draw their earnings in the form of a salary, which is taxed at standard PAYE rates. They can also draw their earnings in the form of bonuses and dividends, subject to overall performance.

The tax-free allowance for dividends are £2000 — meaning that limited company directors will face a reduction in tax-free earnings from these additional sources of income.


Another advantage a limited company has is that operating your business this way is more tax efficient.  This is because a limited company owner only has to pay corporation tax and dividend tax.

Whereas a sole trader will have to pay tax on all of the profits that are above their personal tax allowance (£12,570 for the tax year 2023/24).

Annual accounts

A disadvantage of having chosen a limited structure is that as a limited company owner you have to prepare annual accounts. These need to be filed with the Companies House.

You will also need to file a full corporation tax accounts for the HMRC. Whereas, if you are a sole trader you are under no obligation to actually file any of the accounts that a limited company owner has to.

As a limited company owner, you need to make sure that you seek the help of a limited company accountant to ensure that your accounts are thorough.


A limited company may come across to businesses as a better model to work with than a sole trader. This again links back to the limited liability of a limited company.

Businesses, contractors, clients etc. are more likely to work with a limited company. Why?  Their perception is that a limited company is more professional. A limited company can build a good reputation, which makes it more credible to any parties which want to work with your business.


Final Thought

A sole trader legal structure for your business is the easiest to set up. That’s why it has been proven to be such a popular option. However, there are clear advantages to running your business through a limited company structure. Whichever path you choose, it’s important to understand that your decision isn’t final. It is always possible to change at a later date.


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