Choosing between operating as a sole trader or setting up a limited company is one of the first — and most consequential — decisions you'll make in business.
What is a sole trader?
As a sole trader, you and your business are legally the same entity. You keep all profits after tax, but you're personally liable for any debts. You register with HMRC and file a Self Assessment tax return each year.
What is a limited company?
A limited company is a separate legal entity. It pays Corporation Tax on profits, and as a director you pay yourself a combination of salary and dividends — which is often more tax-efficient at higher income levels.
Key differences
- Tax: Sole traders pay Income Tax and NI on all profits. Limited companies pay Corporation Tax and directors take dividends at lower rates.
- Liability: Sole traders have unlimited personal liability. Limited companies provide legal separation.
- Admin: Sole traders have minimal paperwork. Limited companies must file annual accounts and a corporation tax return.
Which should you choose?
Generally: if your profit is below £30,000–£35,000, a sole trader structure is often simpler. Above that, a limited company usually becomes more tax-efficient. But it's not just about tax — get personalised advice. Book a free consultation.