You’re safe since you’re only liable for a certain amount of money.
Whether you’re a sole trader or a limited company, taking measured risks is a necessary aspect of running business, but only the latter protects you from a calculated risk gone wrong. You’ll be left out in the cold if you choose the former.

The law has stated that a limited company has its own legal personality that is distinct from the people who make up the company since time immemorial (well, 1897). Third parties, such as clients and suppliers, instead of individual directors and shareholders, engage into contracts with the corporation.

The biggest advantage of this legal distinction is that as a director of a limited company, you have limited (capped) liability for the business’s obligations, which usually amounts to the amount you paid for the shares plus any unsecured loans you took out. As a result, if the firm gets into problems or even goes bankrupt, you won’t be held liable for any of its financial losses. One exception to the norm is if the company’s creditors lose money as a result of fraud committed by you as a director, in which case you’ll be held personally liable indefinitely.

In contrast, because a self-employed person and their firm are classified as a single entity for tax and administrative purposes, sole trader status provides no protection from financial claims if a business goes bad. They might face infinite personal liability for their business obligations, and in some cases, even their houses could be at risk

Tax and National Insurance Efficiency

If you work as a director of a limited business and earn a tiny salary, the most of your income will come from dividends, you will still be eligible for State Benefits without having to pay any employer or employee National Insurance Contributions (NICs).

Dividends pay less tax and are exempt from NICs, whereas a sole trader’s full income is subject to NICs. In our article ‘How much should I accept as a salary from my limited company?’ we go through all of this in further detail.

Higher take-home income is certainly the rule of the day with a small business (see our Take-Home Pay calculator for more detail). However, over time, modifications to the dividend taxation structure have eroded some of the tax benefits, resulting in greater taxes for limited company shareholders. However, for many people, operating as a limited business can still be more tax-efficient. Our article “What tax do I pay on dividends?” has the most up-to-date rates as well as some practical examples.

Improved credibility/reputation

In business, confidence is crucial, and a limited company has a professional veneer that can instil confidence in your organisation.

Some clients, particularly large organisations and those in the financial industry, prefer to engage exclusively with limited companies, while others outright refuse to do business with unincorporated entities. As a result, establishing a limited company can open up new business options that would not have been available otherwise.

Other benefits of forming a limited company include:

it is not as expensive or difficult to form a limited company

Most individuals will look at you blankly if you ask them how they would go about founding or forming a limited corporation. A prevalent misperception is that forming a company is a bureaucratic slog that takes months and costs thousands of pounds. The truth is that you can incorporate online in under ten minutes for less than the cost of a takeout pizza, or even for free!

Getting a loan is a lot easier 

A limited company’s separate legal entity may make it slightly easier to acquire financing to help you build your firm than a sole trader. Sole traders, on the other hand, must raise new capital from their own funds. That’s pretty much it if they happen to be cash-strapped at the moment.

Choosing a business name

The company name is legally protected after you register a company with Companies House (or save money by using our Crunch Formations service). This means that there can only be one company with the same name in the UK (or anything too similar). The problem is that as a single trader, you have no control over who uses your business name.

Worse still, if they’re into dodgy dealings (think Cowboy Builders and Rogue Traders) this could hurt your business no end and put you through the stress and inconvenience of having to change your trading name and potentially lose all the hard-earned brand recognition that you’ve built up over the years. But keep in mind that there are some guidelines to follow when naming your company – learn more about how to come up with a fantastic business name.

Keeping a business name safe for the future

Let’s imagine you’ve had a lightbulb moment and have a brilliant idea and a name for a business, but you don’t have the time or the funds to pursue it right now. Instead of abandoning your concept entirely, you can create a dormant company to put it on hold while also protecting its trading name.

A inactive company is one that does not trade and has made no substantial accounting transactions during a financial year, according to HMRC and Companies House. You’ll need to let them both know that your company is dormant and there’s a few things you’ll need to file each year, but setting up a dormant company can protect your future interests.

It’s easier to sell or transfer a company’s ownership.

If you want to call it a day, sell your shareholding or (heaven forbid) you go to meet your maker, it’s much easier to transfer ownership of a limited company than an unincorporated structure. Clients, equipment, and the entire shebang can be packaged and sold.

This can be difficult for sole traders because most of the equipment they use is their personal property, and many aspects of the firm are linked to their personal identity.