Should I register my business as a Sole Trader or Limited Company?

If you’ve decided to go into business for yourself, one of the first big decisions is choosing whether to register your business’ legal structure as a sole trader or as a limited company.

Choosing the right legal structure when you start a business can influence how tax efficient you are as a business.

Starting a Business

What’s the difference between a sole trader and a limited company?

A limited company is a separate legal entity to yourself, whereas being a sole trader means there’s no legal distinction between you and the business.

As you might imagine, this has an impact on your obligations and requirements, as well as what you’re entitled to. The legal structure that you choose also influences how you pay yourself, and how you claim expenses.


How do I pay myself as a sole trader or a limited company?

As far as HMRC are concerned sole traders and their business are the same entity, so they can keep all of the post-tax profits that the business makes. Sole traders pay tax and National Insurance on this income by submitting an annual Self-Assessment return to HMRC to calculate those values.


The Basics of Paying Yourself

If you operate as a limited company, you’re a separate legal entity, so the profits belong to the business. The ways of extracting this profit to be used personally can differ from person to person, so you might pay yourself a salary as an employee of the company, or dividend payments or both.


What am I liable for as a sole trader or as a limited company?

As previously mentioned there’s no legal distinction between a sole trader and their business, so you’re personally liable for all business activity. And yes, sadly this includes any debts!

Forming a limited company limits liability for the directors and shareholders. Any debts are the limited company’s liability, and not yours personally.


Obligations and deadlines for sole traders and limited companies

Being a sole trader means there is slightly less administration than if you run a limited company. You’ll still need to keep detailed records of financial activity for your business whichever structure you choose, although dedicated accounting software like Xero, can make this much easier.



Registering your business

The way you register your business depends on whether you decide to become a sole trader or operate as a company.


Registering your business as a sole trader

Sole traders register by signing up for Self-Assessment with HMRC. The deadline for a sole trader to register for Self-Assessment is 5th October in the business’ second tax year. So, if you became a sole trader in September 2020, make sure you register for Self-Assessment by 5th October 2021 to avoid any potential fines!


Registering your business as a limited company

Setting up your business as a limited company has a slightly different process than becoming a sole trader. You’ll need to register the business with Companies House as well as HMRC, where you’ll be registered for Corporation Tax and als

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