Sole trader vs limited company PI — a decision framework
How you trade — sole trader, partnership, or limited company — affects PI structure more than most consultants realise. The legal entity is not just a tax decision; it shapes who bears personal liability, how PI cover is structured, and what happens if the firm winds up. This guide sets out the structural choice.
The three trading structures
Sole trader
The individual and the business are the same legal person. All contracts, liabilities and assets are the individual's. Personal exposure is unlimited — if a claim exceeds PI cover, personal assets follow.
Partnership (traditional)
Two or more individuals sharing the business jointly. Each partner has unlimited joint-and-several liability. Traditional partnerships (not LLPs) expose each partner personally.
Limited company / LLP
The company is a separate legal person. Personal liability of directors and shareholders is limited to their investment. Personal assets are (in theory) protected, though the veil can be pierced in cases of director misconduct.
How trading structure affects PI structure
Sole trader
PI is in the individual's name. The individual is the insured. Personal exposure remains for any claim beyond limit or excluded from cover.
Partnership
PI is typically in the firm's name (registered as a business), covering the partnership. Each partner remains personally exposed for claims that fall outside cover.
Limited company / LLP
PI is in the company's name. Individual directors have D&O cover as a separate product. Personal exposure is limited but not eliminated — specific personal claims (fraud, deliberate breach) can pierce the corporate veil.
When each structure fits
Sole trader fits when
- Low-risk service; small clients; personal assets not material.
- Simple tax situation; no need for corporate wrapper.
- Contractor operating below revenue threshold for company incorporation to make tax sense.
Ltd company fits when
- Growing consultancy with significant revenue; corporate wrapper offers tax efficiency.
- Personal assets material and worth protecting.
- Multiple owners with different capital contributions.
- Clients require corporate contracting party.
LLP fits when
- Professional practice (solicitors, accountants) where limited liability required by regulator.
- Partnership structure preferred over ltd company for internal governance.
- Regulator-imposed requirement (e.g. accountancy firms).
The transition question: sole trader to Ltd
Many consultants incorporate as their business grows. The PI transition needs attention:
- New PI policy in the Ltd company name from the incorporation date.
- Run-off cover for the sole-trader period to protect against claims arising from pre-incorporation work.
- Coordination of continuous cover to avoid a gap in insured status.
- Update client contracts to reflect the new contracting party.
- Update TOBAs and professional-body records.
The winding-down question
When a firm closes:
Sole trader retiring
Personal PI run-off required. Standard six years; longer for deed-executed work.
Partnership winding up
Firm-level run-off cover typically arranged. Each partner should confirm coverage for their pre-dissolution acts.
Ltd company closing
Company-level run-off. Directors continue to be exposed for personal acts pre-closure — D&O run-off may be needed alongside PI run-off.
Common structural mistakes
- Incorporating without arranging run-off for sole-trader period — pre-incorporation claims fall on personal exposure.
- PI in wrong name — individual-name cover when firm has incorporated, or firm-name cover when trading as sole trader.
- Assuming Ltd status protects personally — corporate veil can be pierced for fraud, deliberate breach, or specific personal-liability activities.
- Missing D&O for Ltd company directors — PI covers professional errors; D&O covers directors' personal liability for corporate governance failures.
- Under-cover in transitions — new structure often has different exposure profile than old.