About this episode

Choosing a business structure matters. Limited companies often get plenty of attention, but operating as a sole trader can be a strong, practical, and flexible option for many business owners.

In this episode, we explain the benefits of operating as a sole trader, including simpler setup, lighter admin, more privacy, greater flexibility, and useful tax considerations. We also look at the drawbacks, including personal liability and growth limitations, so we can make a balanced decision.

What you’ll learn in this episode

• Why sole trader status can suit many small businesses and start-ups.
• How a sole trader business is easier to set up than a limited company.
• Why sole traders often have less admin and more privacy.
• How flexibility and autonomy can help business owners move quickly.
• Why tax should be considered carefully before choosing a structure.
• The main drawbacks of being a sole trader, including unlimited liability.
• When it may make sense to move from sole trader to limited company.

Why business structure matters

Business structure affects tax, admin, reporting, privacy, personal risk, and future plans. It also shapes how we run the business day to day.

A limited company can be the right choice in some situations, especially where risk, investment, growth, or tax planning are important. However, that does not mean every business should become a company from day one.

If you are weighing both options, our comparison episode on Sole Trader or Limited Company: Which Is Best for You? is a useful starting point.

What is a sole trader?

A sole trader is an individual who runs a business in their own name. In simple terms, the person and the business are legally treated as one and the same.

That does not mean a sole trader has to work alone. Sole traders can hire staff, work with freelancers, use PAYE, serve large clients, and build serious businesses. The key point is that ownership sits with one individual.

This structure can be especially useful when we are starting out, testing a business idea, or keeping things simple while the business develops.

Ease of setup

One of the biggest benefits of operating as a sole trader is the ease of setup. Compared with forming a limited company, the process is usually simpler, quicker, and less costly.

In the UK, a sole trader generally registers with HMRC and keeps proper business records. There is no requirement to create a company at Companies House, maintain statutory registers, or file company accounts in the same way a limited company must.

That lighter setup can be valuable for new businesses. It allows us to start trading, test the market, and build confidence without taking on unnecessary structure too early.

Flexibility and autonomy

Sole traders can make decisions quickly. There are no shareholders or fellow directors to consult before every major choice. That can make the business more responsive and easier to manage.

This flexibility can help when the market changes, customers ask for something different, or we need to adjust pricing, services, suppliers, or working methods.

For many small business owners, that autonomy is one of the most attractive parts of being a sole trader. We can shape the business around our goals, our customers, and our working style.

Privacy and lower public reporting

Sole traders usually have more privacy than limited companies. Limited companies must file accounts and company information that can appear on the public record. Sole traders do not have the same Companies House filing requirements.

HMRC can still review sole trader records and accounts, and proper bookkeeping is still essential. However, the level of public disclosure is usually lower than it is for a limited company.

This privacy can be useful for home-based businesses, smaller businesses, or owners who do not want as much financial information in the public domain.

Tax considerations for sole traders

Tax is often quoted as a reason to form a limited company, but that does not always make incorporation the best choice. In some cases, forming a company too early can create more admin, extra costs, and avoidable complexity.

As a sole trader, business profits are normally taxed on the individual. Money taken out for personal use is usually treated as drawings, not wages, and drawings are not normally a tax-deductible business cost.

There can also be situations where sole trader losses are more flexible, especially in the early stages of a business. Tax rules, allowances, and thresholds change, so the right answer should always be based on current advice and the numbers in front of us.

If you want a deeper look at the tax side, our episode on Tax and Your Self-Employed Business: Sole Trader or Limited Company? explains how tax treatment can differ between business structures.

Starting as a sole trader and changing later

Choosing sole trader status does not mean we are locked into that structure forever. A business can start as a sole trader and later move to a limited company when the timing, risk, profits, and plans support the change.

This can be a sensible route. It gives us room to test the business, understand customer demand, build records, and decide whether a company structure is genuinely needed.

If your business is growing and the time feels right, our episode on How to change from sole trader to company explains what to consider before making the move.

Drawbacks of operating as a sole trader

A balanced decision means looking at the drawbacks too. The biggest issue is unlimited liability. Because the owner and the business are legally connected, personal assets can be exposed if debts, claims, or legal problems arise.

This matters if the business has higher risk, larger contracts, employees, borrowing, or possible legal exposure. A limited company can offer more protection, provided the rules are followed and personal guarantees are not given.

Sole traders may also face limits around investment and growth. Investors often prefer companies because shares can be issued and ownership can be structured more easily.

When should we consider a limited company?

A limited company may become more attractive when profits grow, risk increases, investors are involved, or the business needs a more formal structure.

However, the decision should not be based on fashion, hearsay, or what someone else has done. We need to look at profit, tax, personal risk, admin, future plans, and the cost of running the structure.

The best structure follows the business plan. We should choose the route that fits the numbers, the risks, and the future we are building.

Practical steps before choosing sole trader status

• Clarify what the business will do and how much risk is involved.
• Estimate likely income, costs, profit, and cash flow.
• Think about whether privacy and simplicity matter at this stage.
• Compare admin duties for sole trader and limited company structures.
• Consider whether investors or shareholders may be needed later.
• Review tax treatment with up-to-date professional advice.
• Plan when it may make sense to move to a limited company.
• Use calculators, checklists, and proper records to support the decision.

Related episodes

• Sole Trader or Limited Company: Which Is Best for You?
• Tax and Your Self-Employed Business: Sole Trader or Limited Company?
• How to change from sole trader to company

Key takeaway

The benefits of operating as a sole trader are real. The structure can be simple, flexible, private, and cost-effective, especially when a business is starting out or testing an idea.

However, sole trader status also brings personal risk. Unlimited liability, growth limits, and tax considerations all need careful thought. The right choice depends on the business, the numbers, and the future plan.

If you are unsure whether to operate as a sole trader or move towards a company structure, visit ihatenumbers.co.uk or use the related episodes above to build more confidence before deciding.

Plan it, Do it, Profit.

“Start with the structure that fits your business now, then review it as your numbers and risks change.”

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🎧 Enjoyed this episode? Subscribe and leave a review on Apple Podcasts — it helps more business owners understand tax, finance, and their numbers.

Episode Timecodes

• 00:00 – Introducing the benefits of being a sole trader
• 00:55 – Why business structure matters
• 01:37 – Sole traders, limited companies and business attitudes
• 01:57 – Simplicity and flexibility as a sole trader
• 02:17 – What sole trader means in practice
• 03:21 – Faster decision-making and autonomy
• 03:43 – Privacy and public reporting differences
• 04:50 – Starting as a sole trader and changing later
• 05:39 – Tax considerations and when a company may make sense
• 08:21 – Drawbacks, personal liability and growth limits
• 10:10 – Losses, tax flexibility and planning ahead

About the Podcast

The I Hate Numbers podcast helps business owners understand accounting, tax, finance, profit, cash flow, and business planning in a practical way. We simplify financial topics so you can make better decisions and feel more confident with your numbers.

You can also watch more practical finance and tax support on the I Hate Numbers YouTube channel, or listen and follow on Apple Podcasts.

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There are many benefits to being a sole trader, and it's not just in tax terms. In this week's I Hate Numbers Podcast, I'm going to outline the benefits of being a sole trader. I'll also comment on the drawbacks to being a sole trader, talk in terms of where the main advantages are, talk about that point when perhaps we should consider being a company, and showing some tips with you along the way.

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi, folks. Welcome to another weekly episode of I Hate Numbers. This is the podcast that has got a mission to help you make more money in your business to increase the level of financial awareness and literacy that you have, to help you win more battles than you lose, for what goes on between your ears, for you to save tax, save time, and have the business you aspire to.

A pretty good combo if you ask me. Now, choosing the right business structure is critical for any business, any entrepreneur in the United Kingdom and around the world. I'm going to be focusing most of my comments onto the United Kingdom, but there are lessons we can take away from this for the rest of the world outside the United Kingdom.

Limited companies have that kudos attached to them. I think there's a large amount of snobbery and a large amount of thumbing noses up at sole traders, and I think that's a very old fashioned and a very arrogant attitude to adopt. Now, limited companies have their advantages, but operating as a sole trader

also offers immense benefits as well. Now, one of those advantages is the relative simplicity and flexibility as operating as a sole trader. Now, just as a jargon alert here, by the way, when we talk about sole traders, we're talking about an individual who's classified as the proprietor of that business.

Sole traders can still engage staff, take on freelancers, and have staff under PAYE, but the actual ownership, and I use that in a very loose sense of the word, is down to one individual. Now, the formalities in terms of starting up that business is relatively light touch. You have to complete a form and register with HMRC in the United Kingdom. Unless you are planning to use a name that conflicts with anybody else,

there's no legal requirement to register that name. There's no contracts of employment that you have to draw up between yourself and your business, and the admin tasks in terms of filing accounts to Companies House, any statutory register are not necessary. So, the amount of compliance work, the amount of regulation that governs sole traders is much less, and that's going to be a great thing,

certainly, for a business that is starting on its business journey. The ease of setting up, the costs of formation are quite negligible, and once you've done that, a few bits of filling in forms, up and away you go. So, that complex procedures are not going to weigh down heavily. You can make your decisions independently.

You don't need to consult with other directors or shareholders. You are the boss. You are the one who's going to make that ultimate final decision. So, that ease of response, that speed of response to changing conditions is much easier as a result. A second reason for recommending a sole trader structure is the privacy and autonomy that attaches to a sole trader business.

Now, if you are a sole trader, the upside is that you have a greater degree of privacy. No one, apart from HMRC, is entitled to look at your figures, is entitled to look at your accounts. Those aren't disclosed to members of the public. You may have to use them if you are applying for any funds or loans, but in terms of that level of scrutiny, oversight, it's not required if you're a sole trader.

Limited companies, by the way, have to publish their accounts - they will be in abridged form and they're below a certain size and publish those at Companies House. So, some of that information is in the public domain and in line with sole traders, accounts have to be submitted to HMRC. As a small heads up,

by the way, if your business is relatively small i.e below 85,000 pounds worth of turnover, when it comes to disclosing your expenses, you don't actually have to show a breakdown to HMRC. One single aggregate figure is sufficient. Again, my personal view would be that I would not advise that, and all clients that we deal with, we tend to break down those figures to effectively resolve any questions that HMRC might subsequently have.

But I digress. One other thing to consider for considering a sole trader is relative flexibility. Now, for myself, I've been in business for over 28 years, and when I started my business life, I started as a sole trader. I opened up another business that was connected to it, that was opened up as a company, and I operated the two side by side. A sole trader business suited my purposes both in terms of tax efficiency, both in terms of flexibility,

both in terms of the degree of privacy that was attached to it, which I wanted at that time, and when the time was right, I converted that sole trader business into a limited company. So, please bear in mind, folks, you have the ability to start life as a sole trader. You can migrate to becoming a company

when the time is right and when circumstances are there. Now, taxes are often quoted, by the way, as a reason why people should form companies. Unfortunately, in my time of being a business finance coach and accountant, tax advisor, I see many people who incorporate, become companies when it's not actually necessary,

and it is very prohibitive in tax and it's more costly than if they stayed as a sole trader. They will follow a trend. They'll listen to Dave down the pub, and it will form companies when that isn't actually necessary. In terms of forming a company, the general sweet spot for forming a company is profitability, and when that gets to a certain level, approximately 25,000 pounds a year, that's the time to consider

forming a limited company. If you want a more precise answer, folks, by the way, check out the show notes for a link to a calculated resource we have, which contrasts and compares the sole trader versus limited company. Let's get back on with the podcast. So, certainly in tax terms here, and the reason why they might become a sweet spot figure is because when you are a sole trader, and this is a drawback, the profits that you generate, all of those profits that are considered tax profits by HMRC are subject to tax.

And it doesn't matter whether you spend all those profits, whether those profits stay all in the bank account, you'll still pay tax when profits are generated. And note, the amount of money that you withdraw for yourself to live on, you might call that wages, but in tax terms, they're called drawings, do not count as a business cost. As a footnote,

the reason for that is a sole trader is not in legal terms classified as an employee, and therefore, any monies you withdraw for yourself is not a tax deductible expense. Now, one of the benefits of a sole trader business is the national insurance burden. Generally speaking, sole traders will be subject to two types of national insurance.

And again, check the show notes, by the way, folks, for a previous podcast on national insurance contributions. We have the small amount currently for ‘23/’24 that's set at 3.15 pounds per week, and that's the one that contributes towards state pension and future benefits that are national insurance linked.

You have another one called Class four, but those two together, generally speaking, are less than if you were paid a salary through a corporate route. If you're sitting here listening, folks, by the way, thinking ‘Mahmood, you're talking tax, we'd love to hear more’, check out some previous podcasts, and stay tuned and listen as I talk more about tax in a future podcast episode.

Now, it wouldn't be a balanced podcast unless I mention some of the drawbacks to becoming a sole trader. Firstly, you have that idea of unlimited liability. So, if you make contracts, if there are any exposures to any legal actions as a sole trader, even if it's your business name that interacts, you as an individual are personally liable for any misdeeds, any breach of contracts, any debts that accrue, any liabilities that may arise through any misaction on your part.

That means any personal asset you possess, such as houses or anything else, are potentially exposed. If you're a corporate, if you're a C company, as they would call it in the States, or a limited company, then it's the company that is that legal entity, and as long as that company is the one that's engaging with the clients, with the suppliers, with third parties, it's that entity that is legally liable.

Some people, again, will see sole traders having limited growth ability. A lot of investors will not invest in sole trading businesses. They prefer to invest in companies. There are practical reasons for that, by the way, because of the shareholding and the ability to acquire shares in their entity. A sole trader business,

generally speaking, rightly or wrongly, tends to be less investible in. I'm not sure if that's a term, but it's one that I've just thrown into the mix. Now, in summary, folks, becoming a sole trader in the United Kingdom does offer a wide variety of advantages. There are drawbacks to it, obviously, and that's risk,

that's obviously tax. When your profits do get to a certain level, I would recommend that you consider, if not embrace the idea of corporate structures. One of the things I should mention, by the way, and it would only be fair, is tax. Now, I'm going to talk about this in the following weeks, but tax has more flexibility as a sole trader.

So, if you anticipate your sole trader business making losses as it may do in the earlier periods, then you've got much greater capability of loss reliefs and also generating refunds if you are a sole trader. So, for example, if you've had a job before you started a sole trader business, or you are working part-time and paying tax, but you're also incurring losses in the business set up, the business startup,

and in the early stages, those losses can be used against that other income, what we technically call sideways relief to generate some tax refunds. Losses can be carried back also, and again, subject to what your tax history has been like, that will generate refunds for you as well. You do not get that in a company, so the ability to use those losses,

to use them more flexibly, to use them more powerfully, exists if you're a sole trader business. One thing I would summarise here, folks here, is that you do not choose the company structure first without considering what that future looks like. So, you need to have some idea what your twelve months, two years, three years, might look like. You need to have a plan.

You need some idea what those numbers will look like, and then decide the corporate structure. If you're not quite clear, unless there's any specific reason not to do so, then I would always recommend start off as a sole trader, monitor the situation, and if you need to change to a company, then that is relatively straightforward if you've got access to the right support team.

Folks, I hope you found this useful. I hope you've got some benefit from this podcast. If you do, I'd love to hear your feedback. Give me some comments as well. Share it with those who you feel will benefit from that. If you feel you need some support in this area, then check out the show notes, check out the Contact us page, and we'd love to hear from you.

Until next week, folks. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.