Can I Be a Sole Trader and Operate a Limited Company?

Can I Be a Sole Trader and Operate a Limited Company?

Wondering whether you can operate as a sole trader whilst also running a limited company is a common question, and there are a few reasons why you might want to do this. But, are you actually allowed to?

Basically, yes – you can run a limited company and be a sole trader at the same time. What is crucial though, is that as well as keeping your personal and business finances separate, you’re really careful to keep the two businesses totally separate. That means two separate entities, not one business that’s been split in two.

That’s not just us being precious about the bookkeeping either, there are actually several very good reasons for keeping a clear divide between your business, including the lurking presence of HMRC.


Making it clear that you’re not ‘artificially separating’ your businesses

When a business approaches the VAT registration threshold (which means that turnover is getting near the magic £90,000 mark), it’s required to register for VAT.

Sole traders with multiple businesses work out their turnover for VAT on the basis of all their sole trader incomes combined. This is because there’s no legal separate between a sole trader and their business. Limited companies are an entity in their own right, so they work out their turnover for VAT separately.

Some business owners might feel tempted to split their business up, thus dividing the turnover, and therefore getting rid of the need to register for VAT. Don’t do it.

If HMRC get even the slightest whiff that you’re trying to avoid VAT by splitting two businesses in order to stay below the VAT threshold, they’ll be all over you like a rash. This is particularly the case where both businesses are in similar industries.

Recording finances and claiming expenses correctly

On a very practical level – you need to make sure that any expenses you claim (bills, travel costs, broadband etc) are attributed to the right business. Otherwise, you could end up with one heck of an accounting headache!

For example, say you were to claim all your travel expenses through your sole trader business but use it for your limited company work half the time. HMRC would then be within its rights to disallow half the costs you’d claimed, and hit you with a bill for the additional tax – plus penalties.


Be clear what work each business does

In keeping the businesses separate, make sure you’re really clear what work was carried out by which business.

Perhaps all current clients will go through your sole trader business and from now on new ones will go through the limited company. Or maybe you’re a limited company providing kitchen worktops, and a sole trader who does photography.

Unless you clearly document your invoices, including making it clear which business they belong to, HMRC might decide it’s time for an audit.


Should I switch from being a sole trader to a limited company?

The only way to answer this question is to weigh up the pros and cons of being a sole trader versus incorporating the business to become a limited company.

The way you run your business, its turnover, and your personal circumstances, will all be major factors in deciding how to structure your business.


Operating as a limited company

When it comes to setting up as a limited company there are some distinct advantages and disadvantages to think about. For some businesses, it makes more sense to register as a company, because this limits the extent to which you’re personally liable for the business.

So, you won’t start losing personal assets if the company goes belly up, only what you’ve put into the company.

Depending on the level of turnover, and how you pay yourself from the business, it can be more tax efficient, too. As the director of a limited company, you can choose to pay yourself in dividends as well as a salary. The great thing about dividends is their lower tax rate, as well as an additional dividend allowance on top of your personal tax allowance.

Plus, once your company name has been registered no one else can use it, which helps to protect your reputation. The only way a sole trader can do a similar thing is if they trademark their name.

However, it’s well worth chatting to a qualified accountant before making your final decision about whether to remain a sole trader or make the jump to a limited company.


Operating as a sole trader

Some people see being a sole trader as a more attractive option because it’s simpler and faster to register the business with HMRC.

There’s also very little paperwork in setting up as a sole trader. Whereas company directors need to think about the company tax return as well as their own Self Assessment, along with submitting annual accounts, the main thing you need to do as a sole trader is your Self Assessment tax return.

You also won’t need a PAYE scheme to pay yourself a director’s salary, or a separate business bank account, and of course you can keep all your own post-tax profits yourself. There’s also no need to go public on the Companies House website.

The downside of working as a sole trader is that you and your business are legally one and the same. That is to say, you’re personally liable for any business loans and debts the business runs up if things go pear shaped.

Your own assets, like your house, car, or any cash savings, are also at stake. That’s why being a limited company is such a draw because you quite literally have limited liability.

It’s also often more difficult to raise funding and gain investment as a sole trader, which can make growing your business tricky. Lenders – especially banks – tend to see limited liability companies as less risky and often shy away from sole traders.

Choosing the structure that’s best for your business

If there are very strong reasons for separating different business ventures (and you truly keep them separate) this is generally acceptable. Just remember that HMRC will be on the lookout for businesses who deliberately cherry-pick the best bits from each structure in order to avoid tax.

There are pros and cons to being a sole trader and for limited companies, so do your research, and don’t be afraid to ask questions!

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Elizabeth Hughes
A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.