Sole trader vs limited company: find out what’s right for you

Deciding on the best structure for your company can feel big and complicated — and it’s totally normal to feel swamped by all the jargon out there. You’ve probably spent some time weighing up the benefits between a sole trader vs limited company, but the technical details can be confusing for first-time founders.

But don’t worry, we’re here to walk you through everything you need to know, so you can feel confident about making the right choice for you and your business. We look at the pros and cons of limited company vs sole trader, break down the differences, look at the tax side of things and help you figure out what’s right for you. If you’re just getting started, our complete guide on how to start a business is also a helpful place to begin.

Key takeaways:

• It’s easier to set up as a sole trader, with less admin, but you face unlimited liability and may appear less credible to larger clients
• Limited companies offer limited liability, tax efficiency and a more professional image, but setup is more formal and there’s ongoing admin
• For profits below £30,000, being a sole trader is typically more straightforward and cost-effective. Above that, a limited company can provide significant advantages
• Choosing the right structure depends on your appetite for risk, business growth plans, and whether you can manage annual admin responsibilities
  
  

There are many different company structures in the UK, but most entrepreneurs and founders choose between operating as a sole trader or setting up a limited company.

The choice between limited company vs sole trader is usually the first step in your business journey. Both of these structures let you run your business, but the main difference is that a sole trader and their company are legally the same. Whereas a limited company is an entirely separate legal entity. 

For example, if you’re a freelance designer who operates as a sole trader, you’d provide your name and personal details to clients for payment of services. But if you’re a freelance designer who operates under a limited company, you’d provide your limited company’s name and details to clients for payment of services. 

Both structures come with different legal and financial rules. Let’s look at the main differences:

Feature	Sole trader	Limited company
Legal status	You are the business — there’s no legal separation	The business is a separate legal entity from the people who own or run it (that’s you)
Personal liability	Unlimited — this means you’re responsible for all business debts	Limited — this means your personal assets are protected should your business fail
Set-up	Easy — just register with HMRC for Self-Assessment	Formal — requires incorporation with Companies House
Taxes	You’ll pay Income Tax and National Insurance on all profits via Self-Assessment	The Company pays Corporation Tax on all its profits and directors pay Income Tax or Dividend Tax
Reporting & admin	Simple — you’ll do an annual Self-Assessment tax return	More complex — Corporation Tax return, Companies House filings, and Annual Accounts
How you take money	All profits are automatically your income	Money is drawn via a combination of salary and dividends
Public information	Minimal personal details are publicly available	Company accounts, director details and registered address are publicly filed with Companies House and easily found online

It’s easy to see why many entrepreneurs, freelancers and first-time founders choose to operate as sole traders. It’s straightforward, flexible and lets you focus on what you do best without getting bogged down in admin. 

One of the biggest perks of being a sole trader vs limited company is that you don’t need to incorporate (otherwise known as ‘form’ or ‘register’) a company with Companies House. You can start trading whenever you want. However, and this is important, you must register with HMRC (it’s free) so they know you’re self-employed and complete annual Self-Assessment tax returns. 

As a sole trader, you are your business. This means all your profits come directly to you. There’s no process for taking money out — it’s all yours to do with what you please. After you’ve paid your taxes, of course. 

Because you are your business, there’s generally less paperwork when you’re a sole trader compared to a limited company. For example, you don’t need to file annual accounts with Companies House. Completing your own Self-Assessment tax return is usually less complicated — most people can do it themselves, which also negates accounting fees. Another win.

As a sole trader, you have complete control over your business. There’s no board of directors to answer to and no shareholders to consult. You call all the shots.

Who this may be best for: 

• Freelancers, contractors and consultants 
• Those who prefer less admin
• Businesses with low costs and minimal risk
• Individuals testing a business idea
  
  

Being a sole trader sounds pretty good — but it does have some downsides. It’s important to be aware of the drawbacks, especially when it comes to personal risk and how your business might be perceived.

By far the most significant con for a sole trader is unlimited liability. This means there’s no distinction between you and your company, so if your business falls into debt, so do you. This puts things like your house, savings and even your car at risk should you face legal action.

Your business might be doing really well, but banks and investors ultimately view sole traders as less financially stable than limited companies. This means you can run into issues when applying for a business loan or attracting external investment. 

As your business grows and your profits increase, operating as a sole trader can become less tax-efficient. You’ll always pay Income Tax and National Insurance on your profits, but once you hit a higher tax bracket, a limited company structure often offers more opportunity for tax planning — and savings. 

This might feel unfair, but often, larger organisations prefer to work with limited companies over sole traders. This is because limited companies are viewed as being more established and credible. This perception may limit your opportunities, especially if you’re bidding for contracts. 

While setting up a limited company might sound a bit daunting, it does come with some fantastic advantages — particularly as your business grows. When looking at the pros and cons of limited company vs sole trader, the benefits below are often the deciding factors.

Usually, this results in a big sigh of relief for many small business owners. Because your limited company is a separate legal entity, it means your personal assets like house, savings and car are generally protected if the company runs into financial trouble.

When you set up a limited company, your business name has ‘Ltd’ or ‘Limited’ after it. This carries a certain amount of credibility and makes your business look more professional and established to suppliers, clients and even potential investors. Ultimately, this may open more doors to bigger contracts and opportunities.

Once your business starts generating more profit, a limited company can offer significant tax advantages — and who doesn’t like a tax advantage? 

Instead of paying Income Tax on all your profits, the company pays Corporation Tax (which is often lower than higher-rate Income Tax). You can then draw money out through a combination of salary and dividends, which generally leads to a lower tax bill compared to a sole trader earning the same amount. 

Investors and lenders are usually more comfortable dealing with limited companies. The separate legal structure, formal company filing and clear ownership make the company more attractive to external funding. It can also be easier to secure business loans. 

To further the above point, a limited company’s formal structure of shareholders and directors makes ownership very clear. This is very useful if you plan to bring on partners, employees and even sell the business down the line. It also makes it much simpler to transfer ownership or plan for succession — with hopefully less drama than the TV show. 

Who this may be best for:

• Businesses with significant growth potential 
• Those dealing with higher financial risks or liabilities 
• Businesses looking to raise external investment
• Founders/entrepreneurs wanting to minimise personal risk
• Businesses aiming for a more professional image 
• Those with higher profits looking for tax efficiency 
  
  

While a limited company has great benefits, it’s not without its demands. Clearly, there’s more admin involved, which can feel like extra work if you’re not prepared. 

Setting up a limited company involves company registration with Companies House, which requires a bit more paperwork than becoming a sole trader. On an ongoing basis, you’ll have more administrative duties, like filing annual accounts, a confirmation statement and maintaining official company registers. 

All limited companies in the UK have their financial accounts and director information publicly available on Companies House. While this does mean there’s more transparency, it results in less privacy than you’d get as a sole trader. 

As a director of a limited company, you now have official company duties and responsibilities under company law. This may sound a bit scary, but it just means you’re now part of a formal structure, so there are some rules to follow, like filing your company’s annual confirmation statement. Some of these rules carry potential fines if not met — but don’t worry, if you stay organised, you’ll be OK.

You don’t have to become an expert to feel more confident about tax. Just becoming more familiar with the terms and thresholds can really help. 

Comparing sole trader vs limited company tax is essential because it’s where the differences in company structure really become clear. And it’s often the biggest deciding factor for many business owners. Ultimately, the ‘better’ tax option depends entirely on your profit levels and how you plan to draw money from your business. 

As a sole trader, you’ll pay two types of tax on profits that sit above what’s called your ‘Personal Allowance’. Personal Allowance is the amount of income you can earn without paying any Income Tax, which is currently £12,570 (tax year 2024/2025).

• Income tax: You pay tiered rates (20%, 40%, or 45%), depending on the total size of your income. Simply, the more you earn, the higher the rate you pay on the portion above each threshold
• National Insurance (NICs): You’ll typically pay Class 2 and Class 4 NICs on your profits

For sole traders, tax is relatively simple: the more profit you make, the higher the tax rate you’ll eventually hit.

For a limited company, the tax picture is a bit different. There are two main tax events, which is where tax efficiency comes into play. 

1. Corporation Tax: The company itself pays Corporation Tax on all its profits before any money is distributed to shareholders or directors. The tax rate is currently 25% for companies with profits over £250,000, and 19% for companies with profits of £50,000 or less (with marginal relief* helping companies in between)
2. Personal tax: Before Corporation Tax is paid, you’ll pay yourself a director’s salary that’s subject to PAYE Income Tax and NICs. After Corporation Tax is paid, you can then pay yourself in dividends. Dividends are taxed separately and, crucially, are not subject to NICs. 

*Marginal relief prevents a company with profits just over the lower threshold from suddenly paying a much higher tax rate on all its profits. It’s designed to help small businesses over the tax threshold with a gradual, increasing tax rate. 

This is why limited companies can offer a major source of tax savings — it generally leads to a better overall profit retention than paying high-rate Income Tax and NICs as a sole trader.

Because tax is tied to profit levels, many business owners use a sole trader vs limited company calculator to run various scenarios. These tools show the exact net income difference based on your estimated annual profit. 

While we recommend using a professional calculator for precise figures, this is the general rule of thumb to quickly guide your decision:

Being a sole trader is usually more tax efficient, as it involves less admin and less hassle. The savings you might make from a limited company structure don’t outweigh the increased admin costs and accounting fees. 

This is often the crossover point. Here, you might start seeing some tax benefits from a limited company, but you’ll need to weigh these against the extra costs and admin. If you’re worried or need reassurance, it could be a good time to chat to a qualified accountant.

Here, a limited company is almost always more tax-efficient. The lower Corporation Tax and the ability to extract profits through dividends can lead to substantial tax savings compared to higher-rate Income Tax and Class 4 NICs as a sole trader. 

Phew! That was a lot of information. Remember, the best approach depends on your individual circumstances, so it’s a brilliant idea to do some future calculations before making a decision.

Expenses are a business owner’s best friend. The good news is that many allowable expenses are pretty similar whether you’re a sole trader vs limited company. 

The golden rule is that an expense must be, in the words of the Income Tax Act 2007 (there’s some light bedtime reading for you), “wholly and exclusively” for the purposes of your trade. 

This basically means that if you use something for both business and personal reasons (like your mobile phone), you can only expense the business percentage. 

However, there are a few key differences and opportunities, particularly around salaries and pensions.

You can generally expense things like:

• Office costs: Stationery, phone bills, internet
• Travel costs: Fuel, public transport, accommodation 
• Professional services: Accountant fees, legal advice

Salaries:

• Sole trader: You can’t pay yourself a salary because you and your business are the same. But you can employ others and their salaries would be an allowable expense
• Limited company: As a director, you can pay yourself a salary. This is an allowable expense for the company, helping to reduce its Corporation Tax bill 

Pensions:

• Sole trader: You can make personal pension contributions and you’ll receive tax relief on these from the government
• Limited company: The company can make contributions to your pension scheme. These are usually treated as an allowable business expense

Business entertainment: Generally, taking clients out for a meal or other entertainment isn’t an allowable expense for either structure. You can still claim the VAT back on certain entertainment expenses if you’re VAT registered. 

Clothing: You can only expense clothing if it’s a protective uniform or specific to your trade, such as chef’s whites or painting overalls. A normal suit, a nice pair of shoes or a smart bag usually can’t be expensed — unfortunately. 

While there’s a lot of overlap on allowable expenses between the structures, the limited company structure offers more flexibility and opportunities for tax planning.

We’ve talked a lot about being a sole trader or forming a limited company. Another structure you may have heard of is ‘limited liability partnerships’ (LLPs). An LLP is a bit of a hybrid in that it combines some of the benefits of a limited company with the flexibility of a partnership. 

Much like a limited company, an LLP is a separate legal entity from its members (known as the partners). This means it offers limited liability protection to its members but when it comes to taxes, an LLP doesn’t pay Corporation Tax. Instead, each member pays Income Tax and National Insurance on their share of the profits, just like a sole trader. 

LLPs are commonly used by professional services, like legal firms, accountants and architects, where two or more individuals want to operate together, enjoy limited liability, but prefer that items like tax are transparent. 

Pros:

• Limited liability: Members’ personal assets are protected 
• Flexibility: Allows more profit-sharing arrangements than a limited company
• Tax transparency: Profits are taxed at the individual member level, avoiding Corporation Tax
• Image: Often seen as a credible, professional and established structure 

Cons:

• Complexity: LLPs are generally more complex to set up than a limited company or sole trader 
• Public information: Like limited companies, certain information about the company, like directors and registered address, is publicly available at Companies House
• Not for sole operators: You need at least two members to form an LLP, so it’s not an option for individuals 

An LLP might be worth exploring if you’re planning on going into business with one or more partners and want the protection of limited liability without the full Corporation Tax structure of a limited company.

Here we are at the million-pound question! Truthfully, there’s no ‘best’ answer here because it depends on your individual circumstances, business goals and how comfortable you are with risk and admin.

Asking yourself these questions could help point you in the right direction:

1. Are you worried about being personally liable for what happens to your business? 
2. Are you planning to earn over £50,000 in profit per year? 
3. Do you want to scale your business and eventually seek external funding or investment? 
4. How comfortable are you with legal responsibilities, deadlines and admin?
5. Is there a perceived risk associated with your business? 

So, what’s your answer? 

• If you answered mostly ‘yes’ to the above questions, a limited company might be your best bet
• If you answered mostly ‘no’ to the above questions, then being a sole trader could be perfect for you 
• If you’re still on the fence, that’s totally OK. The good news is that you can start as a sole trader and switch to a limited company later if your circumstances change and your business grows. Many businesses do this — it’s a good way to test the waters first before committing

Starting a business is a journey — and whether you opt for the simplicity of a sole trader or the protection and tax benefits of a limited company, both structures are valid ways to start and run a business. 

If you opt to set up a limited company, Countingup is here to help you get your business off the ground, starting with our free company name availability checker and our trusted company registration service. With UK-based human support and services like our business current account, getting set up and managing your money has never been easier.

A sole trader’s accounting year usually aligns with the tax year (6 April to 5 April). For a limited company, its accounting period is typically 12 months long and usually starts on the day it’s incorporated, ending on the anniversary of the last day of the month it was incorporated. 

Yes, the type of insurance you need can differ between a sole trader and a limited company, mainly due to the difference in personal liability. It’s always best to check with an insurance broker to ensure you have the right cover for your specific business structure.

No, IR35 does not apply to sole traders. IR35 is specifically designed to address ‘disguised employment’ where a contractor provides services through an intermediary (like a limited company) but would be considered an employee if they were contracted directly.