Sole trader or limited company?
Sole trader v Limited Company

One of the first decisions to make when you are in business is to decide whether to set up a company or become a sole trader. Sole traders seem to be popular in the UK and IOM, however there are some benefits for considering incorporating to a company. Below are the major considerations to take into account when making a decision.


Tax appears to be biggest factor when deciding between the two.

Companies in the UK pay corporation tax of 19% (to be reduced to 17% on 1st April 2020) on taxable profits, however companies in the IOM pay 0% companies tax (except for banks (10%), landlords (20%) and retail businesses with taxable profits of £500,000 or more (10%). The deadline for filing a corporation tax return is 9 months after the company’s year-end.

Sole traders pay taxes on business profits via their self-assessment tax returns. The tax rates are different between the UK and the IOM, with the IOM sole traders enjoying lower taxes than the UK. The tax rates system is tiered in tax bands depending on the sole trader’s level of taxable income.

It would seem that, purely for tax purposes, it is better to set up a company than to become a sole trader. A limited company only has to pay corporation tax and dividend tax (if in the UK), whereas a sole trader will have to pay tax on all of the profits that are above their personal tax allowance via the self-assessment tax system. There is a bigger incentive for businesses in the IOM to set up as companies because of the 0% corporation tax rate.

Limited liability

It is more beneficial to set up a company than to remain a sole trader as a company brings benefits associated with having limited liability. As a limited company, the business is a separate legal entity according to law, therefore the personal assets and finances of the owners and directors are not affected if the business is unable to pay its debts or it dissolves.

Statutory requirements

Limited companies are required to prepare annual accounts in accordance with the accounting standards, and they need to file these accounts to the Companies House UK or Companies Registry IOM. This would typically require the company to engage with an accountant for the preparation of the accounts, either through internal recruitment, or via outsourcing to a practicing accountancy firm. Sole traders do not actually need to prepare accounts for filing, though they need to produce schedules to calculate business profits for personal self-assessment tax returns.

Moving money out of the business

As a company, there are 3 ways funds can be moved from the business to the personal funds of shareholders or directors:

  1. Salaries – salaries can be paid out; however the company has to register as an Employer with HMRC (UK) or the IOM government and then deduct PAYE and NIC from the directors’ gross salaries to pay over to HMRC or IOM tax office. The directors would then include the salaries they earned in their personal self-assessment tax return at the year of a tax year. This therefore requires a lot of administrative duties in order to comply with the law and to maintain appropriate employment records.
  2. Dividends – Companies can pay dividends to the shareholders, and in the UK, these are taxed via the shareholder’s personal self-assessment based on their tax band, whilst in the IOM they are taxed at 0%.
  3. Loans – Companies can lend funds to owners or directors and maintain a “current account” to keep track of the amounts owed. However, there are tax consequences (at high tax rates) if the loans are not repaid within a deadline stipulated by HMRC or IOM tax office. Therefore, it is best to avoid borrowing too much money from the company.

As a sole trader, because the business and the owner are seen as “1 person”, the funds in the business essentially belong to the owner. Therefore, the owner can make “drawings” from the business. It is recommended though that the business funds should be kept separate from the owner’s personal funds. Drawings do not affect the self-assessment tax of the owner because the sole trader is taxed based on the business profits, and drawings do not affect the profit or loss of the business.Perception
There is a general perception that a company might present itself as a better business model than a sole trader, for example when dealing with suppliers, employees, lenders, investors and/or clients.


There are clear advantages for both, however business set-up is essentially dependent on the circumstances.

Invicta cater to businesses under both models, we can alleviate the administrative burden of setting up and running any type of business in order for you to concentrate on your core operations.

Contact Invicta Accounting on 01624 672 358 or so that we can evaluate your circumstances and provide you with advice on the best approach for your business.