Sole Trader vs Limited Company: Which Structure Is Best for Your Business?
- Published: 8 August 2025
- 11 min read
- Starting a Company
Rodney Wong
Author
Rodney supports customers in the UK in understanding the details and benefits of our products and services, helping them see how technology can transform their business. Passionate about the impact of the written word, he translates tech topics into clear, relevant, and practical insights, inspiring entrepreneurs to bring their ideas to life.
Mosan Ali
Reviewer
Mosan Ali is our Accounting Manager based in the UK and has a wealth of knowledge of UK GAAP, VAT, and PAYE. With 12 years of experience crunching numbers and ensuring compliance, he keeps our financial reporting ship-shape. Think of Mosan as our blog's accounting guru. He carefully reviews our UK-focused content, ensuring it's accurate, up-to-date, and packed with helpful tips for UK businesses. Get your taxes right from day one with our informative blog posts.
Deciding between a sole trader vs limited company structure is a key issue when setting up your business. This guide explains the main differences, legal implications, and tax benefits when choosing whether to be a sole trader or limited company.
Key Takeaways
- Sole traders face unlimited personal liability, while limited companies provide legal separation between personal and business liability, limiting the risk to your assets.
- Tax obligations differ significantly: sole traders pay income tax on profits, while limited companies pay corporate tax, often leading to greater tax efficiency.
- Choosing the right structure depends on risk tolerance, business bank account setup, growth plans, and professional image, with limited companies typically better suited for expansion and attracting investment.
Key Differences Between Sole Traders and Limited Companies
The main distinction between a sole trader and a limited company is their legal structure. A sole trader has no legal separation between the individual and their own business, leading to personal liability for all business debts and obligations, known as unlimited liability. In other words, they are one legal entity. Conversely, a private or public limited company involves being a separate legal entity from its owners, protecting personal assets from business liabilities.
Another key difference is how each legal entity structure handles taxes. Sole traders must pay taxes on their business profits, which is simpler but can be less tax-efficient. Limited companies are subject to corporation tax on their annual profits, often resulting in lower overall tax liabilities and providing more opportunities for tax planning as well as more paperwork.
The choice of business structure can significantly affect your tax obligations and paperwork requirements.
Sole traders enjoy complete autonomy in control and decision-making, maintaining complete control over their small business operations. In contrast, owners of limited companies may share control with multiple shareholders and company directors, complicating decision-making processes. These companies must submit the company’s accounts to Companies House.
If you decide to register a limited company, Osome’s company registration services handle the entire process for you online, ensuring full compliance with local regulations. Our experts take care of the paperwork, filings, and setup, so you can focus on launching and growing your business.
Finally, the choice often depends on future growth aspirations and management preferences. Sole traders enjoy the simplicity and direct control of their business, while limited companies offer better legal support and greater potential for raising capital and expanding the business.
Advantages of Being a Sole Trader
One of the most compelling advantages of being a sole trader is the ease and low cost of setting up. Sole traders can start operating immediately without the need to register with Companies House. This minimal start-up cost, coupled with fewer ongoing financial obligations, makes it an attractive option for many budding entrepreneurs.
Financially, sole traders enjoy the advantage of retaining all the profits after expenses, which is a key benefit of running your own business. This can lead to substantial financial rewards, especially in the early stages of a self-employed business. Additionally, tax responsibilities are simpler for self-employed sole traders, primarily requiring a Self-Assessment Tax Return and fewer ongoing tax returns compared to companies.
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Disadvantages of Being a Sole Trader
Despite its benefits, being a sole trader carries significant risks, mainly unlimited personal liability. This means you are responsible for all business debts, putting your personal assets, like your home and savings, at risk if the business fails. This financial exposure is a key consideration when choosing your business structure.
Funding can also be more challenging for sole traders versus limited companies. Banks and investors often prefer the transparency and stability of companies with a respected business name, making it harder for sole traders to secure capital for growth.
Additionally, operating as a self-employed individual means you bear all major business decisions alone, which can be overwhelming and isolating.
Category | ✅ Advantages | ⚠️ Disadvantages |
|---|---|---|
| 👤 Sole Trader | 💸 Low cost and easy to set up, no need to register with Companies House. | ⚖️ Personally liable for all business debts, risking personal assets. |
| 🧭 Full control over decisions. | 💵 Harder to get funding. | |
| 💰 All the profits go to the owner. | 🧍♂️ Can feel isolating. | |
| 🧾 Simpler tax via Self-Assessment. | ||
| 🏢 Limited Company | 🛡 Personal assets protected by liability limitations. | 💼 More costly and complex to set up and maintain. |
| 📉 Corporation tax often lower than income tax. | 🧾 More tax and reporting requirements. | |
| 🌟 More credible to clients and investors. | ⚠️ Directors have legal duties. | |
| 📈 Easier to raise capital by selling shares. | 🧷 Less operational flexibility. |
While forming a limited company can offer tax benefits as profits grow, it’s not always the better option in every case, especially when it comes to borrowing. Banks may be more cautious with new limited companies, since there’s no personal guarantee if the business fails.
Accounting Manager
Benefits of Forming a Limited Company
Forming a limited company provides the substantial benefit of limited liability, safeguarding personal assets from business debts. This ensures you are not personally responsible for the company’s liabilities or large credit agreements, offering peace of mind and financial security.
Limited companies also pay corporation tax on their profits, which is often lower than the income tax sole traders owe on their profits. This tax efficiency can result in significant savings.
The credibility and professionalism linked to limited companies can enhance your business’s reputation, attracting more clients and investors.
One of the most appealing aspects is the ability to attract investment. Companies can raise substantial capital to sell shares, providing more resources for expansion and growth. This access to investment is a critical advantage for businesses with ambitions to scale, especially for a public limited company.
Drawbacks of Operating a Limited Company
Setting up a limited company incurs higher legal and administrative costs compared to sole traders. The complexity of tax obligations is another significant drawback for limited companies:
- Both company profits and individual owners’ income are taxed, leading to complex tax obligations.
- Extensive legal and regulatory obligations.
- This compliance results in more paperwork and higher accountant fees than sole trader arrangements.
Directors of limited companies also face specific legal responsibilities that can lead to personal liabilities. This added layer of responsibility can be daunting for some owners. Moreover, the restrictions on activities imposed on limited companies can hinder operational flexibility.
According to ONS data as of March 2024, 75.6% of UK businesses were registered as limited companies, while sole proprietorships accounted for just 14.6%, marking a continued shift toward the limited company structure for business operators.
Key Considerations When Choosing Your Business Structure
When choosing the structure of your business, several key considerations come into play:
- Risk is a major factor.
- Sole traders don't have limits on their personal liability and do not benefit from tax reliefs available to corporations.
- Limited companies help protect personal assets from business debts.
Tax efficiency is also important. Sole traders pay income tax on profits, while limited companies pay corporation tax, which can be more tax-efficient above certain profit thresholds.
Growth potential and professional image matter too. Limited companies often appear more professional, boosting customer trust and aiding growth.
Your specific circumstances, such as business size, industry, national insurance status, and goals, should guide your choice. Transitioning to a limited company may offer tax advantages as profits grow, especially when considering national insurance contributions. However, with recent tax increases and changes to company pension contributions, tailored financial and professional advice is essential.
With corporation tax now at 25% for many businesses, the old profit thresholds for going limited don’t apply as neatly — it’s more important than ever to assess your structure based on your industry, income patterns, and long-term goals.
Accounting Manager
When to Switch from Sole Trader to Limited Company?
As your business grows, you may find that your priorities or needs change. Factors such as the need for financial protection, the desire for investment, and the potential for business growth are key indicators that it might be time to make the transition.
Before making this switch, it’s essential to seek professional advice. The transition process involves several steps, including registering with Companies House and understanding the new tax implications.
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How Can Osome Assist You?
Osome offers expert guidance for company registration, helping clients navigate the process of setting up limited companies with company names. Our team of professionals provides comprehensive support through tailored incorporation packages, ensuring that all legal and administrative requirements are met efficiently.
Beyond incorporation, Osome offers subscription services that extend support into ongoing business management and compliance support for business owners.
Summary
Choosing between a sole trader and a limited company is a decision that depends on various factors, including risk tolerance, tax efficiency, business assets, annual profits and growth aspirations. Sole traders enjoy simplicity and full control but face risks when it comes to personal liability. Limited companies offer legal protection, tax exemption opportunities, and potential tax breaks, but come with higher running costs and administrative burdens.
If you choose to set up a limited company, Osome’s company registration services make the process easy by facilitating all documentation and compliance requirements online. Contact us to take the first step toward setting up your business with confidence.
Rodney supports customers in the UK in understanding the details and benefits of our products and services, helping them see how technology can transform their business. Passionate about the impact of the written word, he translates tech topics into clear, relevant, and practical insights, inspiring entrepreneurs to bring their ideas to life.
