When starting a business in the UK, one of the first decisions you'll need to make is whether to operate as a sole trader or set up a limited company. Each structure has its own advantages and drawbacks, and the right choice depends on your business goals, financial situation and risk appetite. Let’s break down the key differences to help you decide!
1. Legal Structure & Liability
Sole Trader
A sole trader is a self-employed individual who runs a business as themselves. There is no legal distinction between you and your business, meaning you are personally responsible for any debts or liabilities.
Limited Company
A limited company is a separate legal entity from its owners (shareholders) and directors. This means that the business itself is responsible for its debts, offering limited liability protection to its owners.
📌 Key Difference: As a sole trader, you are personally liable for business debts, while a limited company offers protection for personal assets.
2. Tax & Financial Obligations
Sole Trader
You won’t have to register with Companies House and file annual accounts or deal with corporation tax – just a simple Self Assessment tax return each year.
- Pays Income Tax on profits through Self Assessment.
- Subject to Class 2 and Class 4 National Insurance Contributions (NICs).
- If turnover exceeds £90,000 (as of 2024), must register for VAT.
Limited Company
- Pays Corporation Tax (currently 19-25% depending on profits).
- Directors usually take a salary (subject to PAYE) and can receive dividends (taxed separately).
- Must submit annual accounts to Companies House and file a Company Tax Return with HMRC.
📌 Key Difference: Limited companies often benefit from lower tax rates on profits, but they have more administrative and reporting obligations.
3. Control & Decision-Making
Sole Trader
- You have full control over business decisions and operations.
- You don’t need to consult shareholders or directors.
Limited Company
- Decisions may need approval from directors or shareholders.
- More structured governance but can provide credibility to investors and partners.
📌 Key Difference: Sole traders have full control, while limited companies may have multiple decision-makers.
4. Profit & Earnings
Sole Trader
- Keeps all profits after tax.
- No distinction between personal and business finances.
Limited Company
- Profits belong to the company.
- Earnings are taken as salary or dividends, which can be tax-efficient.
📌 Key Difference: Sole traders can access their earnings more freely, while limited company directors need to structure their income efficiently.
5. Credibility & Business Image
Whether you are a sole trader or a limited company, your business name is the cornerstone of your brand, so choose wisely! It must be unique and not too similar to existing names.
Use a Company Name Checking tool to search the database of over 5 million registered company names and more than 11 million registered UK domain names to check if the name you want is available.
Sole Trader
- Easier and quicker to set up.
- Can sometimes appear less professional than a limited company.
Limited Company
- More credibility with clients, suppliers and investors.
- Your business name is protected – no one else can register the same name.
📌 Key Difference: Limited companies often appear more trustworthy and professional, making it easier to attract investors and bigger clients.
6. Costs & Administration
Sole Trader
- Minimal setup costs and paperwork.
- Fewer legal obligations and accounting requirements.
- Annual Self Assessment tax return is required.
Limited Company
- More paperwork, including annual accounts and confirmation statements.
- Accountancy fees tend to be higher due to stricter reporting requirements.
- Registration with Companies House is required.
📌 Key Difference: Sole traders have less admin and lower costs, while limited companies face more paperwork but can offer tax efficiency and growth opportunities.
Which One is Right for You?
Choose a Sole Trader structure if:
✅ You want a simple and low-cost way to start trading.
✅ You’re a freelancer, contractor, or running a small business with low risk.
✅ You don’t mind personal liability for business debts.
Choose a Limited Company if:
✅ You want to limit personal liability and protect your assets.
✅ You aim to grow your business and attract investment.
✅ You want tax efficiency and the ability to structure your income.
✅ You want to appear more professional and credible to clients.
Final Thoughts
Both sole trader and limited company structures have their pros and cons. If you’re starting out and want something simple and flexible, a sole trader setup might be best. But if you’re planning for growth, investment, or tax efficiency, forming a limited company could be the smarter choice.
If you’re still unsure, our team of experts is here to help! Get in touch today to discuss the best option for your business journey.