Should You Set Up As A Sole Trader Or A Limited Company?

By Author: Martin
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One of the first decisions every entrepreneur faces is whether to operate as a sole trader or register as a limited company. The choice can significantly impact your tax, liability, and how your business is perceived.

In this article, we’ll explore the key differences between these two business structures to help you make an informed decision.

1. What Is a Sole Trader?
A sole trader is the simplest business structure in the UK. You run the business as an individual, and there’s no legal distinction between you and the business.

Pros:

Easy and quick to set up

Fewer reporting requirements

Complete control over profits

Cons:

Unlimited liability — you're personally responsible for debts

May appear less credible to larger clients

Limited tax planning options

Learn more about the sole trader structure on GOV.UK

2. What Is a Limited Company?
A limited company is a separate legal entity from its owners (known as shareholders). It must be registered with Companies House and follow more formal administrative processes.

Pros:

Limited ...
... liability — personal assets are protected

More tax-efficient once profits grow

Appears more professional and credible

Easier to raise funding or sell the business

Cons:

More admin and legal responsibilities

Must submit annual accounts and Confirmation Statements

Profits must be extracted via salary, dividends, or director's loan

For more information, read the Wikipedia article on Limited Companies

3. Tax Implications
Sole Trader Tax:

Pay Income Tax on all profits

Must register for Self Assessment

National Insurance: Class 2 and Class 4

Limited Company Tax:

Pays Corporation Tax on profits (currently 25%)

Directors usually take a small salary + dividends

Potential for tax savings through careful planning

4. Responsibility and Liability
Sole traders have unlimited liability, meaning personal assets are at risk.

Directors/shareholders of a limited company have limited liability, protecting personal wealth unless fraud or negligence is involved.

5. Perception and Growth Potential
Clients and suppliers often see limited companies as more credible and trustworthy. If you plan to scale your business, seek investment, or hire employees, a limited company may be the better option.

So, Which Is Right for You?
Factor Sole Trader Limited Company
Setup Simple Requires registration
Tax Less efficient after £50k+ profit More flexible
Liability Unlimited Limited
Admin Low High
Perception Informal Professional

If you’re unsure, it’s wise to seek advice from an accountant who understands your goals.

Get Professional Advice from Limited Company Accountants
At Limited Company Accountants, we specialise in advising UK businesses on the best structure for their goals. We’ll help you:

Register your limited company with Companies House

Understand tax implications

Stay compliant with HMRC and company law

Thinking of switching from sole trader to limited company? Talk to Limited Company Accountants today for expert guidance.