A limited company is a business that is a separate legal or financial entity from the person running it and must be registered with Companies House. This is different to a sole trader or partnership (see below) as it’s owned by the shareholders and run by appointed directors.
A limited company will also have different tax responsibilities to other company structures such as a sole trader or a partnership. Any profit made after any taxes are paid, is the property of the company.
You can either be a limited company by shares or by guarantee. To be ‘limited by shares’ means that as a business you generally make a profit and that the company: Is legally separate from the people that own it
Has separate finances from the owner’s private finances
Has shares and shareholders
Is entitled to keep any profit it makes after tax
To be ‘limited by guarantee’ means that generally the business is not for profit and the company:
Is separate from the people that own it
Has separate finances from the owner’s private finances
Has guarantors and a ‘guaranteed amount’
Invests any profit back into the business
If you run into difficulties with your business, your personal assets are still secure, according to Rapid Formations
More tax efficient than a sole trader – limited companies in the UK pay 25% Corporation Tax on profits, whereas sole traders pay 0-45% Income Tax on their profits
By setting up as a limited company you can reduce your Income Tax and National Insurance contributions by taking a combination of salary and dividends
You need to be incorporated at Companies House and have to pay a fee to do so
Company names are subject to certain restrictions
If you make any changes to your company details, you must notify Companies House immediately
A sole trader is someone who is self-employed and runs their own business as an individual, or you work for yourself. Examples of sole traders are plumbers, designers and e-commerce store owners.
To be classed as a sole trader, you need to run your own business. You’ll need to register as self-employed with HMRC.
As a sole trader, you can keep all the profits your business makes, once you’ve paid tax on them. There are four tax rates you could be charged:
Income £0 – £12570: No tax payable
Income £12,571 to £50,270: 20%
Income £50,271 to £125,139: 40%
Income £125,140 and above: 45%
To set yourself up as a sole trader you must:
Have earned more than £1,000 from self-employment in the last tax year
Be able to prove you’re self-employed
Want to make voluntary Class 2 National Insurance payments to help you qualify for benefits
You can find out more on how to register as a sole trader in our article here.
Gorilla Accounting has a handy list on the pros and cons of being a sole trader. Here are some of them:
You have full control
Setting up as a sole trader is easier than other business types
You can easily change your business structure later
More difficult to get financing than other business types
You make all the decisions
Sole traders have the same tax status as individuals, so is less flexible than a limited company
Being a freelancer is another form of self-employment. Freelancers are usually registered as sole traders, but you can also choose to register as a limited company.
Being a freelancer gives you the freedom to choose who you work for and when you complete the work. You can also set your own work rates. Freelancing has been a common type of work for a number of industries over the last few years and this trend doesn’t seem to be slowing down.
As a freelancer, you have the ability to work across several projects at any given time, compared with contractors who will commit to a fixed-term at one job/project before moving on to another.
Think of doctors’ surgeries, solicitors, hairdressers and the likes. Companies where you have a group of skilled people who join together to start their own business or practice.
When you set up a partnership, there is generally a document called ‘Deed of Partnership’ that is put together to show how much each person has invested, how any profits or losses will be split and who from the partnership is responsible for things like bookkeeping etc.
In a partnership there is the added help with decision-making, splitting the workload and sharing a number of other day-to-day tasks. Each partner must also pay tax and NI on their individual split of profit.
In a partnership, there’s often an extra pair of hands to help out
There is less financial burden on one person
There’s no need to register with Companies House and registering the business partnership for taxation with HMRC is quite simple
A partnership will have no independent legal existence beyondthe partners. This means, unless legally stated otherwise, the business will be dissolved upon the resignation or death of one of the partners
As a sole trader, you’d keep all your business profits, but according to Indeed, in a partnership you’d share all the earnings according to a percentage split you all agreed on
Decision making might be slower than if you ran the business by yourself. You’ll have to consult all partners in order to make some business decisions
Becoming a franchise is to join an already established company. It’s most common in the fast food / restaurant sector where the main company (franchiser) sells the rights to use their branding and business model to a franchisee for an ongoing price.
It’s an easier way of starting a business as you’re given all the tools needed to get up and running (suppliers, equipment etc.) but it does come with restrictions. As part of a franchise, you might be required to turn over a proportion of profits to the franchiser and may be tied into using certain suppliers.
A business set up with the goal of helping society or the environment. A social enterprise must be seen to return is profits into causes that help attain its objectives. There are several types of social enterprise that can be set up, such as:
They can be an inspiring place to work, according to MoneyMagpie
Social enterprises are more flexible than charities, and they don’t rely on funding
There are grants and schemes available for social enterprises, like the Social Enterprise Boost Fund
According to MoneyMagpie, it can be difficult to set up a social enterprise that is both profitable and makes a difference
Despite being grounded in a good cause, social enterprises are still businesses and can be hit by market changes
How to know which is right for me
When it comes to setting up your business, understanding what business type is best for you is an important first step.
A sole trader is the easiest way to set up your business and there are great tools on the market like Mettle’s business bank account that can help you manage your business finances on the go. But you have the same tax status as an individual and could pay up to 45% in tax, depending on how much you earn
A limited company gives you greater freedom, because it is seen as a separate legal and financial entity to you, meaning if something goes wrong with your business, your personal assets are protected
With freelancing you have more freedom to dictate when you work, but your cashflow might not be as predictable because of it
A partnership is a good option to have more hands on board, sharing of knowledge and work. But it means decisions can be slower and all profits (and losses) will have to be split between all partners
A social enterprise is rooted in a good cause and wanting to make a difference in society, but as a business it still needs to be profitable to do so
Once you understand which business type is for you, you’ll need to get a business bank account. For freelancers, sole traders or limited companies, Mettle has features to help you get paid on time and become tax confident. You can also connect to accounting software like FreeAgent, Xero or Quickbooks, right from your Mettle app.
This blog was updated on 25 September 2023
The content of this blog is based on our understanding of the topic at the time of publication and should not be taken as professional advice. Any of the information may be subject to change. You are responsible for complying with tax law and if in doubt, should seek independent advice.
Frequently asked questions
What is business ownership?
Business ownership refers to the legal control over a business and who is responsible and liable for the business.
How do I change from a sole trader to a limited company?
It’s always good to talk to your accountant first, before you make a change like this, to understand any tax implications.Read more
To change from a sole trader to a limited company, you’ll first need to choose your name. There are different rules for limited companies when it comes to a business name. The government website outlines what those are here.
You’ll then need to register with Companies House, which will cost you £12. After that, you’ll need to let HMRC know you’ll no longer be a sole trader.
As a limited company, you’ll also need to have a separate business bank account.