It’s one of the most common questions we get from new business owners:
“Should I set up as a sole trader or a limited company?”
And the honest answer? It depends.
Your income, personal risk, long-term goals, and how much flexibility you want with tax planning all play a part.
In this post, we’ll break down the key differences and walk you through how to choose the right setup for your situation.
Sole Trader vs Ltd Company: What’s the difference?
A sole trader is you, trading in your own name or a business name. You’re responsible for everything, and you get to keep all the profits. But you’re also on the hook if anything goes wrong.
A limited company is its own legal person. It has its own bank account, pays its own taxes, and you’re the director in charge. You can still pay yourself, but your personal finances are separate from the business’s.
| Feature | Sole Trader | Limited Company |
|---|---|---|
| Legal identity | You are the business | The business is a separate legal entity |
| Set-up | Simple and quick | More admin and legal requirements |
| Taxes | Income Tax + Class 2 & 4 NICs | Corporation Tax + personal tax on salary/dividends |
| Liability | Unlimited (your assets at risk) | Limited (your assets protected) |
| Privacy | No public record of earnings | Directors’ details and accounts are public |
Why people choose to stay as sole traders
This setup is popular with freelancers, creatives, consultants, and small business owners in the early stages. It’s simple and low maintenance.
Reasons to go sole trader:
Easy to register with HMRC
Less paperwork and admin
You keep all the profits
You can take money out of the business whenever you need it
That said, being a sole trader also means you’re personally liable for any debts. If something goes wrong, it’s your own savings or home that could be at risk. And when your profits grow, you might end up paying more tax than necessary.
When it might be time to go limited
Running a limited company comes with more responsibilities, but also more benefits. Once your profits reach a certain level, or if you’re working with high-value contracts or clients, a company structure can give you more flexibility and protection.
Reasons to go limited company:
Your personal assets are protected from business debts
You can split income between salary and dividends
You might pay less tax overall, especially at higher profit levels
Some clients prefer working with limited companies
It looks more professional to banks, investors, and larger clients
Of course, there are extra responsibilities. You’ll need to file annual accounts, report to Companies House, and follow specific rules around how you pay yourself. Director details and company accounts are also made public.
What about tax?
Tax is one of the biggest reasons people switch to a limited company.
As a sole trader, you pay:
Income Tax on your profits
Class 2 and Class 4 National Insurance
As a limited company, the company pays:
Corporation Tax on its profits
You then pay personal tax on any salary or dividends you take
The tipping point is usually around £35,000 to £50,000 in annual profit. At that level, the tax savings of being a limited company can start to outweigh the extra admin.
How to choose the right structure
If you’re still unsure, ask yourself:
How much do I expect to earn in the next year?
Am I taking on any financial or legal risk?
Do I want a simple setup or a structure I can grow into?
Do I want to leave some profits in the business for future plans?
Will being a limited company make me look more established?
The more you answer “yes,” the more likely it is that a limited company is a better fit.
If you’re just starting out and keeping things small and steady, sole trader is often the simplest option.
If you’re planning to grow, protect your assets, and get a bit more strategic with your tax, a limited company is usually worth it.
The good news: it’s not permanent
This isn’t a decision you’re stuck with forever. Many people start as sole traders, get a feel for running a business, and then move to a limited company when the time is right.
We help clients make this switch all the time, and it can be done smoothly with the right support.
Want some tailored advice?
Choosing between sole trader and limited company isn’t just about tax. It’s about how you want to run your business and what’s going to give you peace of mind.
If you want to talk it through, we’re here to help.
👉 Book a call and we’ll walk you through your options with no pressure and no nonsense.
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