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1st October 2021

One of the most frequently asked questions we accountants come across seeks to answer what trading vehicle people should choose. The answer depends on various factors, which we look at towards the end of this blog, but first, let’s see the differences between being a sole trader and running a limited company.

Business structure and responsibilities

Sole trader

As a sole trader, you are working as an individual and carry the responsibilities of your business, such as paying the bills and keeping sales and expenses records. There is no legal distinction between you as an individual and your business, so you are personally responsible for any losses your business makes.

Limited Company

A limited company is a business structure where the shareholders are only responsible for their individual investment, hence the name: limited. Two main limited company structures exist:

Private (LTD) companies limited by shares – Most small businesses use a private limited company where shareholders own the company divided by shares that cannot be sold on public markets.

Public limited company (PLC) – Limited companies of a certain size can offer their share for the public to purchase on stock markets to raise funds. In return, they then pay dividends to those investors.

Paying taxes

Sole trader

As a sole trader, you need to pay taxes and National Insurance like everyone else. The only difference to those in employment is that you do it through an annual self-assessment tax return. To complete the return at the end of the year, it is crucial that you keep all income and expenditure records for the year. Your taxable income is then worked out on the tax return, and taxes and NI contributions are calculated.

If you are VAT registered, your records must be kept and submitted digitally per the Government MTD (Making Tax Digital) rollout.

Limited company

Paying taxes when you operate a limited company is a bit more involved, so you probably need a help of an accountant.

Because the limited company is a separate entity from you, it pays its taxes separately to you as well. Your accountant will prepare the annual accounts and your company tax return, calculating the profits and how much tax to pay.

Your income comes from profits remaining in the company after tax (distributable profits/dividends) and the salaries you take. All this goes on your self-assessment return, and you pay the taxes due.


As a sole trader, the administration is pretty simple; you register for self-assessment online and are ready to go. Keep records of your outgoings and invoices and if you have to submit a quarterly VAT return. Instead of preparing company accounts, you must submit a tax return at the end of the year and you are done. There are so many apps and tools around to help you; if you are handy enough with them, you can do this yourself.

A limited company needs more involvement and increases your responsibilities as a director. From incorporation to annual confirmation statements, to accounts to corporation tax returns to reporting changes to Companies House, you may wish to delegate some of these tasks to an accountant.

A limited company director’s responsibilities

Responsibilities to Companies House

As a director, you’re legally responsible for running the company and ensuring information is sent to the Companies House on time.

This includes:

  • the confirmation statement
  • the annual accounts, even if they’re dormant
  • any change in your company’s officers or their personal details
  • a change to your company’s registered office
  • allotment of shares
  • registration of charges (mortgage)
  • any change in your company’s people with significant control (PSC) details

You can hire an accountant to manage some of these things day-to-day, but you’re still legally responsible for your company’s records, accounts and performance.

General duties of a director

As a director, you must perform 7 duties under the Companies Act 2006. These still apply if:

  • you’re not active in your role as director
  • someone else tells you what to do
  • you act as a director but have not been formally appointed
  • you control a board of directors without being on it
  • Company’s constitution
  • You must follow the company’s constitution and its articles of association. These are written rules about running the company, agreed upon by the members, directors and the company secretary. The constitution sets out what powers you have as a director and the purpose of those powers.

Promote the success of the company

You must act in the company’s best interests to promote its success. You must consider the:

  • consequences of decisions, including the long term
  • interests of its employees
  • need to support business relationships with suppliers, customers and others
  • impact of its operations on the community and environment
  • company’s reputation for high standards of business conduct
  • need to act fairly to all members of the company
  • If the company becomes insolvent, your responsibilities as director will apply towards the creditors instead of the company. A creditor is anyone owed money by the company.

Independent judgement

You must not allow other people to control your powers as a director. You can accept advice, but you must use your own independent judgement to make final decisions.

Exercise reasonable care, skill and diligence

You must perform to the best of your ability. The more qualified or experienced you are, the greater the standard expected of you.

You must use any relevant knowledge, skill or experience (for example, if you’re a qualified accountant).

Avoid conflicts of interest

You must avoid situations where your loyalties might be divided. You should consider the positions and interests of your family to avoid possible conflicts.

You should tell other directors and members about any possible conflict of interest and follow any process in the company’s articles of association.

This duty continues to apply if you’re no longer a director. You must not take advantage of any property, information or opportunity you became aware of as a director.

Third-party benefits

You must not accept benefits from a third party that are offered to you because you’re a director. This could cause a conflict of interest.

The company may allow you to accept benefits like reasonable corporate hospitality if it’s clear there’s no conflict of interest.

Interests in a transaction

You must tell the other directors and members if you might personally benefit from a transaction the company makes. For example, if the company plans to enter a contract with a business owned by a member of your family.

Other duties

Other duties you must perform as a company director include:

  • not misusing the company’s property
  • applying confidentiality about the company’s affairs

Which one is best for you?

A question asked by many, and the answer lies with you and your circumstances. We recommend discussing your business and personal goals with your accountant. K

We hope this article has helped answer some of your questions about the differences between being a sole trader and limited company trading.

To find out which is the best fit for you and see how MyAccountant can help, please get in touch by sending an e-mail to info@myaccountant.co.uk or calling us on 0800 917 9100.

If you’d like to see more articles like this, please visit the blogs section of our website and follow us on LinkedIn, Facebook or Twitter.

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