Starting a business can be a daunting task that often involves making difficult decisions. Every business requires a legal structure regardless of its size, but deciding on whether to set up as a sole trader or limited company affects your tax obligations, legal responsibilities, and growth opportunities.
Choosing the wrong structure can have long-term implications and can even limit the opportunities available to your business. Before deciding on which structure to adopt, it’s important to understand the pros and cons of a limited company and a sole trader.
So, what is the difference between a sole trader and a limited company, and which one is right for you?
What is a limited company?
A limited company has its own legal identity, separate from its owners. The company’s assets and liabilities are separate from the personal assets of the business owner. This means that the shareholders and directors are not personally responsible for the company’s losses and debts. Their liability is limited to the value of their investment.
Chat to one of our limited company accountants to learn more.
How is a limited company set up?
A limited company is owned by its shareholders and divided into portions based on the amount each shareholder has invested. This can be one sole shareholder or multiple shareholders.
Setting up a limited company involves:
- Choosing a simple and unique business name.
- Appointing company officers (at least one director who will manage the company according to the law, the internal set policies, and prepare annual accounts for the business per the Companies Act of 2006; shareholders; guarantors; and secretarial staff).
- Documenting how the company will run, including details of directors, shareholders, and responsibilities.
- Registering the company with Companies House by submitting the Articles of Association and a Memorandum of Association detailing the business assets, trading activities, names of all company owners, and their percentage of ownership.
Once registered, your company can start trading.
What taxes does a limited company pay?
Limited companies pay Corporation Tax on their business profits, and depending on their activities, they may have to pay other taxes such as VAT and Employers’ National Insurance contributions.
You don’t have to pay Income Tax as a limited company. However, if you’re employed as a company director, you may need to pay Income Tax and National Insurance on your earnings. So if you’re an owner and employee of the company, you could be paying NICs on two accounts.
How are limited company taxes calculated?
As of April 2023, the main Corporation Tax rate is 25% for profits over £250,000. Smaller companies with profits under £50,000 pay a 19% rate, with a tapered rate in between.
Limited company directors can mix their salaried pay with dividends, which can reduce their personal tax and National Insurance liabilities.
What is a sole trader?
A sole trader is a self-employed person who runs their own business in their own name. Since it isn’t incorporated, it’s often considered the simplest form of business structure.
Although you can hire workers, a sole trader is owned and run by just one person, making the owner and the business one legal entity. This also means the owner is personally responsible for all business decisions, debts, and liabilities.
You get to keep profits after tax as a sole trader, but it’s important to remember that you also carry unlimited liability for any losses. Sole traders are often people who provide specialist services, such as plumbers, electricians, and hairdressers. Unlike limited companies, sole traders can move money in and out of the business without tax implications.
Get in touch with our sole trader accountants to find out more.
How do I register as a sole trader?
Starting as a sole trader is an easy process. You can decide to work full-time on your business or part-time while still working for an employer.
Setting up as a self-employed sole trader involves:
- Understanding what self-employment means, including your tax requirements, what records to keep, and whether a sole trader is the best setup.
- Choosing a unique business name to trade under
- Register for Self-Assessment with HMRC (you can do this through your Government Gateway account).
- Register for VAT if your turnover exceeds the threshold (£90,000 as of 2025/26).
What taxes do sole traders pay?
Sole traders pay Income Tax based on their taxable profits, as well as National Insurance contributions and, in some cases, VAT.
Reasonable expenses such as travel expenses, marketing, materials and stock, internet and phone for business use, utility bills, and rent for business premises are offset from your self-employed income when calculating the taxes on your Self-Assessment tax return.
For tax purposes, your taxable profits must be well prepared in accordance with UK GAAP (body of accounting standards).
How are sole trader taxes calculated?
As a sole trader, how much tax you pay depends on your annual profits and which tax rate your earnings fall under. Everyone has an annual personal allowance, which is currently £12,570 (2025/26), and this is the amount you can earn before paying tax.
The current tax rates for the 2025/26 tax year are:
| Taxable Income | Tax Rate | Band |
| Up to £12,570 | 0% | Personal allowance |
| £12,571 – £50,270 | 20% | Basic rate |
| £50,271 – £125,140 | 40% | Higher rate |
| £125,140 or more | 45% | Additional rate |
The advantages and disadvantages of a sole trader vs a limited company
When deciding whether a sole trader vs limited company setup is better, it’s important to weigh up the practical advantages and potential drawbacks of each company structure for your situation. We’ve outlined them for you to help you compare at a glance.
| Business Structure | Advantages | Disadvantages |
|---|---|---|
| Sole Trader |
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| Limited Company |
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Choosing between a sole trader vs a limited company
Figuring out the best structure for your business is a personal decision. It’s one that a professional accountant like Ascott Blake can help you with, but ultimately, the choice is yours and largely depends on your profits and your financial goals.
A limited company setup is great for growing businesses that want to clearly distinguish between business and personal finances. It offers more protection because it is a separate legal entity and protects your personal assets if the company gets into financial difficulty.
A sole trader structure is used by many freelancers, tradespeople, and smaller self-employed individuals as it’s usually easier to set up and run. However, it does mean that you and your business are legally the same entity, which means you are personally responsible for any debts, putting your personal assets at risk.
If you are unsure where to begin, then our accountants can help you choose the best option for you.
Get expert business structure advice from Ascott Blake
At Ascott Blake based in Bishops Stortford, we understand the hassle of starting a business, whether as a sole trader or a limited company. We provide you with corporate advisory services to ensure that you set up your business with ease and that your business makes a profit.
Our team of experts offers tailored solutions to help you achieve your goals and make sure you understand these two different legal structures before making any decisions. Plus, we’ll recommend the business type based on what matters most to you, leaving you safe in the knowledge that you’re on the right path.
Ready to take the next step in your business journey? Call us on 01279 797 222 today or complete our enquiry form and we’ll be in touch.
You may be interested in: How to boost your small business cash flow.
FAQs – limited company vs sole trader
Is a limited company better than being self-employed?
Limited companies may be a preferred choice if you plan to start a big company, since they offer more protection against personal liability. Plus, they provide additional benefits such as tax relief, employee benefits, and easier access to finance. It is not the personal responsibility of the shareholders to meet the debts when the company is unable to. Your decision also depends on other factors, such as your future goals and your current financial position.
You should weigh the pros and cons of the two legal structures and see which works best for you.
Which is more tax efficient, a sole trader or a limited company?
A limited company can be a more tax-efficient setup in some cases, particularly for companies with high profits, as they usually pay Corporation Tax at a lower rate compared with sole trader tax rates. Limited company directors can also combine salary and dividends to reduce some of the tax liabilities.
Can one person be a limited company?
Yes, in most cases, a single individual can incorporate a limited company. However, you must apply for HM Revenue & Customs (HMRC) permission. Setting up as an individual is possible for small businesses that want to run independently without having other shareholders.
When should I set up a Ltd company?
If you want to grow your business, raise capital, or protect your personal assets, then setting up a limited company may be the right move. This structure is also worth considering if you need greater access to finance or plan to sell the business in the future. However, it’s important to carefully consider your long-term plans before making the decision.
Do I need a business bank account as a sole trader?
You don’t need to open a business bank account as a sole trader, but it can help to separate business profits from other personal income, and it certainly helps when it comes to tax. Some personal bank accounts may restrict use for specific business transactions, too.
