Sole Trader vs Limited Company: Which is Right for You?

Paul Edwards
Apr 23
3 min read

When starting or growing a business, one of the most important decisions you’ll make is how to structure it legally, here we help you weigh up Sole Trader vs Limited Company.

In the UK, the two most common options are to operate as a sole trader or to set up a limited company.

Each option has pros and cons, and the right choice depends on your goals, risk appetite, and future plans. This guide breaks down the differences and helps you decide which path is right for you.

What is a Sole Trader?

A sole trader is the simplest business structure. It means you're self-employed and legally responsible for the business. You and the business are the same legal entity.

Key features:

You keep all the profits after tax.
You’re personally liable for any business debts.
You report your income and expenses via Self Assessment.
It’s quick and inexpensive to set up.

Who it suits:

Freelancers and consultants.
Side hustles and lifestyle businesses.
Anyone starting out and testing a business idea.

What is a Limited Company?

A limited company is a separate legal entity from its owner(s). It’s registered at Companies House and has its own legal identity.

Key features:

Your personal liability is limited – hence the name.
The business pays Corporation Tax on profits.
You can pay yourself via salary and dividends.
It offers more credibility and investment opportunities.

Who it suits:

Growing businesses with higher profits.
Anyone employing staff.
Those looking for tax efficiency.
Businesses with greater risk or legal exposure.

Key Differences to Consider

Let’s explore the main factors to weigh up:

1. Taxation

Sole Trader:

You pay Income Tax on profits via Self Assessment.
Profits over £12,570 are taxed at 20%, 40%, or 45% depending on your income.
You also pay Class 2 and Class 4 National Insurance.

Limited Company:

The company pays Corporation Tax (currently 19%-25%) on profits.
You can take a salary (tax-deductible for the company) and dividends (which are taxed separately).
Potential for tax efficiency if profits are retained in the business or structured carefully.

✅ Winner for tax efficiency: Limited company – especially once profits exceed around £30,000–£50,000 per year.

2. Liability and Risk

Sole Trader:

You’re personally liable for all debts and legal claims.
If the business fails, your personal assets (house, savings, etc.) are at risk.

Limited Company:

Your liability is “limited” to your investment in the company.
Personal assets are usually protected.

✅ Winner for protection: Limited company.

3. Admin and Costs

Sole Trader:

Simple to register and manage.
Fewer forms and filings.
Lower accountancy fees.

Limited Company:

More admin: annual accounts, confirmation statements, director responsibilities.
Higher accountancy costs.
More rules and regulations.

✅ Winner for simplicity: Sole trader.

4. Professional Image

Sole Trader:

Perceived as smaller or less established.

Limited Company:

Can boost credibility with clients, suppliers, and investors.
Your business name is protected when registered.

✅ Winner for credibility: Limited company.

5. Funding and Investment

Sole Trader:

Harder to attract outside investment.
Limited to personal or business loans.

Limited Company:

Easier to raise funds through shares or equity investment.
Investors prefer the limited liability structure.

✅ Winner for growth potential: Limited company.

6. Privacy

Sole Trader:

Only HMRC sees your earnings and business details.

Limited Company:

Your accounts and details (including directors’ names and addresses) are on public record.

✅ Winner for privacy: Sole trader.

So… Should You Be a Sole Trader or Set Up a Limited Company?

Here’s a simple guide to help you decide:

Consideration	Best Option
Just starting out / side hustle	Sole trader
Profits under £30k/year	Sole trader (initially)
Profits over £30k/year	Limited company (tax saving)
Need to protect personal assets	Limited company
Want a simple setup and less admin	Sole trader
Looking for growth/investment	Limited company
Want a more professional image	Limited company

Can You Switch Later?

Yes – and many people do. You can start as a sole trader, then form a limited company later as your business grows. This gives you time to test the waters and get comfortable running your business.

Equally, if you form a limited company and find it’s not working for you, you can dissolve it and go back to being self-employed. The key is to review your situation regularly.

Final Thoughts

When it comes to debating Sole Trader vs Limited Company, there’s no one-size-fits-all answer. Think about your:

Financial goals
Appetite for admin
Willingness to take on personal risk
Future growth plans

And if you’re still not sure? Speak to an accountant who can review your situation and help you choose the best structure based on your numbers and your plans.

Need tailored advice? At Strength in Numbers Limited, we help business owners weigh up their options and make confident decisions. Whether you're just starting out or scaling up, we’re here to guide you.👉 www.strengthinnumbers.co.uk