One of the first decisions when starting a UK business is the legal structure. The two most common choices for small businesses are sole trader and private limited company. Neither is automatically better. The right answer depends on your risk, income, plans and how much admin you are happy to handle. This guide explains the main differences in plain English. We are not licensed financial or tax advisers, so treat this as general information and check your own situation with an accountant or HMRC.
What a sole trader is
A sole trader runs a business as an individual. You and the business are legally the same person. You keep the profits after allowable expenses, register for Self Assessment with HMRC, and pay income tax and National Insurance on your profits through your tax return. Setting up is simple and cheap, which is why many freelancers and tradespeople start this way. Our guide to registering as a sole trader explains the steps.
What a limited company is
A limited company is a separate legal entity. It is owned by shareholders and run by directors, and often one person is both. The company earns the money, pays corporation tax on its profits, and you take money out as salary, dividends or other legitimate routes. Registering is done through Companies House or via an agent, and a registration fee applies, so check the current figure on GOV.UK.
Liability: the biggest difference
As a sole trader, you are personally responsible for business debts, which in a worst case could put personal assets at risk. In a limited company, liability is generally limited to the amount unpaid on your shares, so your personal assets are usually protected. That said, protection is not absolute. Directors can still be personally liable in some situations, such as personal guarantees given to lenders or wrongful trading, so it is not a licence to be careless.
Tax: it is not as simple as one being cheaper
Many people assume a company always saves tax. Sometimes it can, especially once profits are higher and you leave money in the company or take dividends, but rates and allowances change between tax years. Corporation tax rates currently depend on profit levels, with a lower rate for smaller profits and a higher main rate for larger ones. Dividend taxes and National Insurance rules also change. Because the numbers move, run a comparison for your own profit level using current figures from HMRC or an accountant, rather than relying on a rule of thumb you saw online.
Paperwork and costs
Sole traders file one personal tax return and keep records of income and expenses. Limited companies have more to do: company accounts, a corporation tax return, an annual confirmation statement for Companies House, payroll if you pay yourself a salary, and records of directors’ loans and dividends. Accountancy fees are usually higher for companies. Good bookkeeping matters either way. Also note that company directors and people with significant control have to complete Companies House identity verification; see our note on the 18 November 2026 deadline.
Privacy and credibility
Company details, including director names and registered office, appear on the public register, although there are ways to use a registered office address rather than a home address. Some larger customers prefer working with companies, and some contracts require it. Sole traders have fewer public filings, which some people prefer.
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VAT and other thresholds
The structure you choose does not by itself change when you must register for VAT. The threshold applies to the business’s taxable turnover, whether sole trader or company. Our article on the VAT registration threshold explains the current position.
Can you switch later?
Yes. Many people start as sole traders and incorporate when profits or risk grow. Moving assets, contracts and customers to a company can have tax and practical consequences, so plan the change with an accountant rather than rushing.
How to decide
A sole trader setup tends to suit early-stage, low-risk, lower-profit businesses that want minimal admin. A limited company often suits higher profits, higher risk, plans to hire or raise investment, or clients who prefer a company. Ask yourself four questions: how much risk am I taking, how much profit do I expect, how much admin can I manage, and what will my customers expect? Write down your answers, get a quote from an accountant, and compare using real numbers.
Finally, remember that rules and rates change each tax year. Always confirm details on GOV.UK before you commit.
Common questions
Do I need an accountant as a sole trader? Not legally, but many people use one for their first return. For a limited company, most owners use one because of the extra filings.
Can I be a sole trader and have a company at the same time? Yes, some people run a sole trader activity alongside a company, but each has its own tax treatment and records.
Does a limited company pay me automatically? No. The company’s money belongs to the company, so you pay yourself through salary, dividends or repaying a loan you made, and each route has rules and tax consequences.
Is there a cost to closing a company? You can dissolve a company through Companies House, but you must settle debts and tax first, and fees may apply. Take advice if there is anything unusual, such as outstanding loans.
