What are the main differences between a business run by a sole trader or partnership and a company managed by its director/shareholders?

This is a freeview 'At a glance' guide.

This comparison is for a trading business. Many of the points summarised here are not relevant if you want to compare individuals or companies managing investment businesses.

See also:

At a glance

Sole trader or partnership

Limited company: you are director & shareholder

You are the business.

The business is a separate legal entity to it's shareholders and directors.

You are the owner.

You are a shareholder; you hold all or part of the company's share capital.

You are the manager or proprietor.

You serve the company as its officer as a director (a company secretary is an officer too).

In the event of any legal dispute, you will be sued personally unless you have suitable insurance. You should read the small print on any insurance policy very carefully.

If you are in business with someone you can run the business via a Limited Liability Partnership (LLP) to protect yourself from personal liability. Partners can be jointly liable for certain acts of the LLP which can result in personal bankruptcy. 

In the event of any legal dispute, the company will be sued, not its owners.

Owners or directors may be held personally liable for a company's wrongdoing in some situations. e.g:

  • In general law, where the director has perpetrated fraud.
  • Where the director has committed specific offences such as corporate manslaughter, or under health and safety, environmental acts, companies acts and listing rules.
  • In cases of fraud or deliberate behaviour of the directors to avoid tax and for penalties involving deliberate concealment.
  • For offences by Senior Accounting Officers of large companies.

Employment status

  • You are self-employed; you cannot be your own employee.
  • In difficult times, such as the COVID-19 pandemic as you are self-employed government support is likely to be based on your trading profits.
  • Members of a Limited Liability Partnership on fixed profit /no risk arrangements may be automatically classed as employees.

See Salaried members' rules

 

Employment status

  • A director is an office holder, this does not automatically make you an employee for employment law, the National Minimum Wage or Tax Credits.
  • For Income Tax and National Insurance, company officers are treated as employees.
  • During the COVID-19 pandemic government support was based on payroll salary.
  • If the Off-Payroll Working rules apply, fees paid to the company, in respect of personal services supplied by the company to its end client are taxed under PAYE/NIC by the end client. The worker (generally the company owner) is treated for tax as if being employed directly by the end client. No extra employment rights are created. 

See Employment status: Directors

Tax on profits

  • You pay Class 2 & 4 National Insurance Contributions (NICs) and Income Tax on the taxable profits of your business, or your share of profits if you are in partnership. 
  • Note that from 6 April 2024, Class 2 NICs are abolished. 
  • See Income Tax rates and NICs rates.

Tax on profits

  • A company pays Corporation Tax on its taxable profits. Despite the April 2023 increase in Company tax rates they remain lower than higher rates of Income Tax.
  • Employees and officeholders are subject to PAYE and NICS on their earnings. Many benefits attract Income Tax and NIC charges for the employer.
  • Shareholders are subject to Income Tax on Dividends and some distributions e.g. a disqualifying Purchase of own shares or Capital reduction falling within Transactions in Securities. Distributions come within the £500 tax-free dividend allowance (£1,000 for 2023-24 and £2,000 for 2022-23 and earlier).
  • If the Off-Payroll Working rules apply, fees paid to the company are taxed under PAYE/NIC.
  • When IR35 applies, the company must deduct PAYE and NICs on the deemed payment. 

Losses

  • You can offset your trading losses against your other income.
  • There is a cap on the amount of relief you can claim for losses and interest payments. See Limit (cap) on Income Tax reliefs.

Losses

  • The company can flexibly offset trading losses against its other income, but not against your income as an individual shareholder.
  • See Company Losses

Extracting profits

Extracting profits

You are taxed on:

Borrowing

  • You are free to borrow from the business bank account, it is your account.
  • If your business bank runs at an overdraft due to the amount of funds that you have withdrawn personally, tax relief on bank charges and interest will be proportionately restricted.

Borrowing

Borrowing by directors is permitted. Limits are set by the Companies Act 2006. There are tax costs.

  • The company will pay a tax charge of 33.75% (32.5% up to 5 April 2022) if you borrow from the company and do not repay the loan within nine months of the year-end.
  • If the loan is interest-free there will be a beneficial loan interest tax charge for the director.
  • See Director's loan account toolkit

Pension

  • You can only have a Personal Pension.

Pension

  • A Share Incentive Plan (SIP) or Self-Administered Scheme (SAS), or an unapproved scheme may be used to hold assets used in the company and may have flexibility on borrowing.
  • You must consider pension arrangements for employees, see Pensions Auto-enrolment.

Insolvency

  • If the business fails you will be personally (or jointly with your partners) liable for its debts. You may go bankrupt.

Insolvency

  • If the company fails, your liability is limited to the amount unpaid on your shares (if any) unless you have made personal guarantees for the company's borrowing.
  • As a director, you can be held personally accountable if you continue trading when your company is insolvent and this causes financial loss to creditors. 
  • See Insolvency FAQs for boards

Making Tax Digital for VAT

Making Tax Digital for VAT

  • Same requirements as for a Sole Trader

Making Tax Digital for Income Tax

  • From April 2026 self-employed businesses and landlords with business turnover above £50,000 join MTD for Income Tax.

Making Tax Digital for Corporation Tax (CT)

  • The start date for MTD for CT is uncertain. It will not be before April 2026. 

Accounts

  • You can choose cash accounting or conventional (accruals) accounting, see Accounting: Simpler Income Tax (cash basis) / fixed expenses.
  • If you trade through an LLP you must prepare accounts for filing with Companies House. General partnerships and sole traders have no such filing requirements.
  • You may need annual accounts to complete your personal tax return including a balance sheet.
  • Small businesses may use a very basic (three-line) format for a business that trades below the VAT threshold.
  • Your accounts are not submitted to HMRC unless you are subject to an investigation.
  • Your taxable profit under Self Assessment must be prepared in accordance with Generally Accepted Accounting Practices (GAAP) for tax purposes unless you are cash accounting.

Accounts

  • You must prepare annual accounts under the provisions of the Companies Act, and file them with Companies House.
  • HMRC require full accounts for Corporation Tax which must be submitted online in iXBRL.
  • Accounts must be prepared in accordance with Accounting standards.

Selling the business

When the business or assets used in it are sold, you are personally taxed on any gain under the Capital Gains Tax (CGT) rules.

Selling the business

When the business or the assets used in it are sold, there is a double tax charge on shareholders. The company pays Corporation Tax on any profit on disposal. The shareholders are taxed on the distribution of the proceeds.

  • It may be more efficient to sell the shares in a company, rather than its trade, business or individual assets.
  • Provided that you own more than 5% of a trading company, a disposal with gains of up to £1 million, and this is a lifetime limit, may qualify for CGT Business Asset Disposal Relief.

Death

  • When you die your business ceases. You can pass all or part of it down to the next generation.
  • In a partnership you can pass on your share of the partnership.
  • Business Property Relief (BPR) will apply for Inheritance Tax (IHT) purposes if the business is a qualifying trade.

Death

  • When you die the company lives on: it is a separate legal entity.
  • The company’s shares will qualify for Business Property Relief (BPR) for IHT purposes, providing the company activities are not wholly or mainly investment activities.
  • There is no IHT relief on outstanding directors’ loans.
  • Business assets that are held outside the business qualify for 50% BPR.

Paying yourself

  • You can withdraw any amount of profits, it is not classed as remuneration as you are not an employee.

Paying yourself

  • There is no restriction on the size of your salary, but it is subject to PAYE and NICs.
  • Paying a salary to a spouse or family members must be commercially justified to be allowable for tax purposes.
  • If your contracts fall within the IR35 regime or the company is a managed service company, PAYE and NICs will apply to income.
  • See Tax planning for directors.

Expenses in general

  • You obtain tax relief for expenses that are incurred Wholly and exclusively for the purposes of the trade.
  • An adjustment must be made to add back the proportion of any expense that relates to 'private use'.
  • Most commonly private use will be in respect of use of telephones or power, own consumption of goods and motor running expenses. See What expenses can I claim? (self-employed).

Expenses in general

  • The company obtains tax relief for its expenses if they are incurred wholly and exclusively for the purposes of the trade.
  • If a director incurs private expenses through the company, they may be treated as earnings. If they are only a shareholder the amounts are treated as distributions.

 

Cars and fuel

  • A sole trader or partner can claim capital allowances on a car, disallowing a proportion for private use. See Capital Allowances: Vehicles.
  • Low-emission cars can be tax efficient for family members on the payroll.
  • There is no adjustment for fuel benefit for you as a sole trader, you disallow a proportion of your fuel costs for private use. See Motor expenses (self-employed).

Cars and fuel

  • The company obtains full capital allowances on cars, irrespective of any private use by employees. See Capital Allowances: Vehicles
  • Low emissions vehicles attract a low or zero Benefit In Kind tax charge and can be a tax break for family members on the payroll
  • If you run your own car the company can reimburse using HMRC’s Authorised Mileage rates.
  • It is not tax efficient to provide petrol or diesel company car drivers with fuel for private use. Employers can reimburse company car drivers for business mileage but they must use special Employer's advisory rates.

Mobile phones

  • Mobile phones will be subject to private use restrictions. A tax add-back is expected on your tax return.

Mobile phones

  • Mobile phones can be provided tax-free if the contract is in the company’s name.
  • Only one per household.
  • See Tax-free benefits and perks.

Computers

  • You can obtain capital allowances on a computer. An add-back will apply if there is substantial private use.

Computers

  • Providing you need to use one to perform your role your company can provide a computer without any tax consequences.

Tax-free benefits and incentives

  • These do not apply to the self-employed.

 

Tax-free benefits and incentives

  • Many different benefits and employment incentives can be provided free of tax (the company will obtain tax relief on the cost of providing these too).
    See Tax-free benefits and perks.

Working from home

Working from home

  • You can claim £6 per week without receipts for home expenses (£4 per week to 5 April 2020).
  • Alternatively, the company can reimburse you for light and heat but not mortgage interest or council tax.
  • See Working from home (directors).

Charging rent for use of home

  • A sole trader cannot charge himself rent.

 

Charging rent for use of home

  • As a director you may set up a licence between you and your company to rent an office (or other space) in your home.
  • You must declare this as income and prepare rental accounts for Self Assessment tax purposes.
  • See Directors: what expenses can I claim? 

 


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