Sole trader vs limited company

When you're starting out as a business, one of the first and most important decisions you'll face is how to structure it. For the vast majority of small businesses, the main question is: should I register as a sole trader or go through the process of forming a limited company?

It’s a decision that carries weight – not just for how you run your business day to day, but also for your tax obligations, financial liability, and even how customers, clients and partners perceive you.

In this guide, we’ll walk you through some of the main differences between a sole trader and a limited company and unpack the key advantages and disadvantages of each to help you decide which is better suited to your goals.

And if you’re leaning towards a limited company, we’ll show you how to set everything up, from incorporation to opening a business account, in one simple process with Zempler Bank.

What is a sole trader?

A sole trader is the simplest form of business structure. You operate the business as an individual, keeping all the profits after tax – but also shouldering all the risks.

Currently, there’s no requirement for sole traders to register with Companies House. But as a sole trader you will need to tell HMRC you’re self-employed and file an annual Self Assessment tax return.

Plumbers, freelance designers, market traders, self-employed consultants – lots of people choose this route because it’s straightforward, low-cost and easy to manage.

Key features of a sole trader:

• You and the business are legally the same
• You keep all profits after tax
• You’re personally liable for business debts
• You pay Income Tax and National Insurance on profits.

Setting up as a sole trader is ideal for those just starting out or who want to keep admin to a minimum. But with simplicity comes exposure. There’s no legal separation between you and the business – so if things go wrong, your personal assets could be at risk.

What is a limited company?

A limited company operates as a separate legal entity from its owners (called shareholders) and its directors (who run the company day to day – sometimes the same person).

This structure offers more protection than being a sole trader because if your company runs into financial trouble, your personal assets are usually safe. The liability is ‘limited’ to the value of your shares or the company’s assets, not your own.

The flip side is that it comes with more paperwork and tighter rules. You’ll need to register with Companies House, maintain proper records and file both a Company Tax Return and annual accounts.

Key features of a limited company:

• It’s a separate legal entity from its owners
• Directors have limited liability
• The company pays Corporation Tax on profits
• You can pay yourself a salary and/or dividends
• Gives you greater credibility with some clients, suppliers and lenders

Sole trader vs limited company: the key differences

Here’s how these structures typically compare across the areas that matter most to business owners:

Tax considerations

Unsurprisingly, tax is a big influencing factor for many business owners. Sole traders pay Income Tax on all profits above their personal allowance (currently £12,570), plus Class 2 and Class 4 National Insurance where applicable.

Limited companies pay Corporation Tax on their profits (between 19% and 25% depending on the level of profit – see Corporation Tax rates). As a company director, you can pay yourself a low salary (which is taxed through PAYE) and top it up with dividends, which are taxed at a lower rate than salary income – especially if you stay below the annual dividend allowance.

Depending on your personal circumstances, this mix of salary and dividends can be more tax efficient – especially once your business starts making bigger profits. But as it can be complex to get this balance right, you’ll likely need an accountant.

Corporation Tax rates

Correct as of 9th May 2025

Legal protection and risk

This is where the limited company structure has a clear edge. As a sole trader, you are your business. If your business gets into debt or is sued, your personal savings, car, or even home could be at risk.

With a limited company, your liability is generally limited to the amount you’ve invested in the company. Personal assets like your savings, car and house are usually protected unless you’ve personally guaranteed a loan or acted fraudulently.

Professional image and credibility

Perception matters. Some clients – especially larger companies – prefer to (or will only) work with limited companies.

Operating as a limited company can signal a higher level of professionalism and permanence. It can also make it easier to open a business bank account, get business funding and build long-term trust with suppliers.

That said, being a sole trader doesn’t mean you’re any less capable or serious and lots of people run successful businesses this way. But if image plays a role in your industry, it’s worth considering how your business structure reflects on you.

Admin and paperwork

Sole traders enjoy a low-maintenance setup. All you need do is keep track of your income and expenses and file a Self Assessment tax return once a year.

Limited companies come with a whole lot more admin. You’ll need to:

• Register with Companies House
• Maintain statutory records (things like your company filings and confirmation statements)
• Submit annual accounts and a confirmation statement
• File a Company Tax Return with HMRC
• Operate PAYE if you pay yourself a salary

To stay compliant you might also need professional help – like an accountant or company secretary. While it’s not unmanageable, it is more involved and adds to your overheads.

Cost of running each structure

The cost difference can vary depending on your setup and turnover. Sole traders usually have minimal costs beyond general business expenses and National Insurance contributions.

Limited companies may have to pay for several other costs:

• An accountant and/or legal fees
• Corporation Tax
• Payroll costs (if you’re paying a salary)
• Annual filing fees

When should sole traders consider becoming a limited company?

There’s no legal income threshold that forces a sole trader to incorporate as a limited company. But there are some good reasons to think about switching to a limited company as your business grows.

1. Increased profits

As your profits grow – particularly beyond the £50,000 –  £60,000 mark – you can assess whether a limited company might offer a more efficient way to manage your tax. This will depend on your individual circumstances though, so it’s always worth speaking to a qualified accountant to understand what’s most suitable for your business.

2. Greater financial risk

With more clients, higher-value contracts or increased operational costs, your level of personal financial exposure as a sole trader also goes up. The limited liability that comes with a company structure can offer peace of mind – though it doesn’t remove your risk entirely.

3. Professional image

Certain clients or suppliers may prefer or insist on working with limited companies, especially in industries where perceived size, formality and even brand matter. Incorporating can help position your business as more established – though plenty of sole traders build highly trusted reputations without doing so.

4. Future plans for growth

If you're thinking about taking on investment, bringing in a cofounder or hiring employees, a limited company may offer you more flexibility. For example, you can issue shares and split ownership – options not available to sole traders.

5. Operational complexity

As your business grows, the separation between personal and business finances can become harder to manage. You may find the structure of a limited company brings more clarity and professionalism, even if it also comes with added admin.

Ultimately, whether and when to switch structures is a personal decision. Speaking to an accountant or advisor can help you assess the pros and cons for your specific situation.

Can I start as a sole trader and switch later?

Absolutely. Lots of business owners start out as sole traders because it’s an easy, cost-effective way to test the waters. If your business gains traction, you can incorporate later to benefit from tax efficiency and legal protection. It’s a natural progression. 

If and when you do decide to switch from sole trader to limited company, Zempler Bank can help through our dedicated Formations service.

Ready to go limited? Zempler makes it simple

We make it easy to set up your limited company and apply for a business bank account in one fell swoop. No juggling different platforms or chasing paperwork here – just a simple, seamless process built for business owners with better things to do than navigate red tape.

Learn more about our Formations service

Conclusion

Choosing between a sole trader and a limited company isn’t just a legal formality – it’s a strategic decision that affects every part of how your business works. Take time to weigh up your options, think about the future, and consider the protection, tax benefits, and credibility that come with each structure.

And when you're ready to form your limited company, we'll be ready to help.