Sole trader vs limited company: which company structure is right for you?

If you’re debating whether to start a business as a sole trader or limited company, it’s important to understand both business structures properly.

Put simply, your business structure determines who will be making the major decisions, how much tax you’ll pay, how you’ll be allowed to raise funds, and who has financial liability for the business.

“Sole trader” and “limited company” are the most common structures, but if you’re not sure where to start, this guide will walk you through what each structure means, their advantages and disadvantages, and how to choose the right one for you.

Sole trader vs limited company: which one is best?

Deciding whether to set up as a sole trader or a limited company can be a tricky decision to make at first, as it sets up your business on two different trajectories. And while you can always change your mind later down the line, it’s better to get it right the first time, so you don’t have to worry about bothersome admin work.

But before you make that decision, it’s important to know how the two structures differ. Here’s a quick breakdown of the key differences:

Advantages of being a sole trader

✅ Easy set-up: you just need to register with HMRC, and you can be up and running within a day. In comparison, setting up a limited company involves more admin, such as choosing a company name, registering with Companies House, and handling ongoing compliance.

✅ Lower ongoing costs: compared to a limited company, there are fewer business overheads. You don’t need to hire an accountant unless you choose to, as accounting software like QuickBooks or even just using a spreadsheet can help you stay compliant.

✅ You keep all the profits: after taxes, all the profits belong to you. For example, if you earn £30,000 a year, that full amount — minus your tax and National Insurance — is yours to keep. In a limited company, profits belong to the company, and you’d need to pay yourself through salary or dividends.

✅ Full control: this is ideal for people who prefer not to answer to shareholders or directions. While you might still be in control with a limited company, there are formal obligations and sometimes other directors or investors to consult, depending on how your company is set up.

✅ Less obligations: there’s no need for financial statements, statutory accounts, or board meetings — you simply submit a Self-Assessment tax return each year. Meanwhile, limited companies face stricter regulations, which can be a hassle for small operations that don’t yet need that complexity. 

Disadvantages of being a sole trader

❌ Unlimited liability: for example, if you take out a loan to buy expensive equipment for a coffee shop business and can’t repay it, the lender could come after your personal assets, such as your car or even your house. If a limited company goes bankrupt, your personal finances are generally safe.

❌ Lack of work-life balance: you’re wearing all the hats — marketing, admin, finance, customer service, operations and more, making work-life balance difficult. In a limited company, you can eventually hire staff, bring in co-directors or outsource tasks more easily.

❌ Harder to raise funds: sole traders can struggle to secure business funding, especially from traditional banks and investors. Banks often prefer limited companies because their structure is perceived as more stable and lower risk. 

❌ Limited growth potential: taking on more work than you can handle can lead to missed opportunities or inconsistent service. In a limited company, you can take on business partners, hire staff more easily and divide responsibilities equally to allow for easier growth.

❌ Tax responsibilities: you are responsible for managing your own taxes, including tracking all income and expenses, filing a Self-Assessment tax return every year, and paying income tax and NICs. This can be overwhelming without an accountant, especially during busy seasons.

Who is suited to being a sole trader?

Being a sole trader isn’t for everyone, but it’s a great choice for certain types of people and businesses. For example:

• Freelancers/consultants: people offering services on their own, like copywriters, graphic designers, developers, or marketing consultants. They often have low overheads, work with multiple clients and don’t need a complex structure.
• Small local businesses: those running a small-scale operation like a hairdresser, gardener, handyman, or cleaner. You can focus on offering your skills without complicated admin or filing.
• Low-risk startups: businesses with minimal financial risk or upfront costs. You can always switch to a limited company later as things grow.

Advantages of a limited company

✅ Limited liability: your personal assets are protected, so if things go wrong financially, you’re generally only liable for what you put into the company. For example, if your online store goes into debt, creditors can’t come after your personal assets unless you’ve signed a personal guarantee.

✅ Tax efficiencies: limited companies pay corporation tax, and you can pay yourself through a combination of salary and dividends to reduce your overall tax bill. A company making £50,000 might pay less tax overall than a sole trader making the same, thanks to this structure.

✅ Professional image: clients, suppliers, and investors may take you more seriously. A registered company name adds credibility, especially in B2B industries. Having a “Ltd” next to your name may be seen as more trustworthy when pitching your business as well.

✅ Easier to raise funding: angel investors and venture capitalists are more comfortable putting money into limited companies because they can get shares and there’s more structure. Banks also see them as more secure.

✅ Name protection: your registered company name is protected in the UK, so no one else can legally use the same one. Sole traders don’t get this benefit.

Disadvantages of a limited company

❌ More admin and legal responsibilities: you’ll have to file annual accounts, confirmation statements, and corporation tax returns. Even a small company with one director still has to follow formal reporting rules each year.

❌ Public records: your company’s financial information, registered address, and director details are publicly available on Companies House. This means anyone can look up how much profit you made last year or where your office is registered.

❌ Less flexibility in profit: you can’t just withdraw money from the business account like a sole trader. The money belongs to the company, and you need to follow proper channels (e.g. payroll or dividends) to access it.

❌ Complex set-up and closure: both starting and closing a limited company are complicated compared to being a sole trader. If things don’t work out, you need to go through formal steps to dissolve it properly.

❌ High costs: while registering a company is relatively cheap (incorporation on Companies House is £50), ongoing costs for accountancy, software, legal advice and compliance can add up  — often hundreds or thousands a year.

Who is suited to a limited company?

A limited company is best suited for businesses that are looking to grow, want protection for their personal assets, or are looking for a more professional image. This includes:

• High-risk businesses: if your business involves significant financial risk (e.g. loans, large contracts, etc.), then a limited company protects your personal finances with limited liability. 

Example: a construction contractor that hires subcontractors and signs big contracts is safer operating through a limited company than as a sole trader.

• High-growth businesses: if you’re planning to hire staff, attract investors, or expand nationally or internationally, a limited company structure offers the flexibility to grow. 

Example: a small tech startup developing an app would benefit from this structure so it can bring on investors, give out shares, and scale quickly.

• Businesses with multiple owners/directors: if you’re going into business with partners, a limited company lets you split ownership through shares, define roles, and outline responsibilities clearly.

Example: two friends starting a digital agency can each own 50% of the company, with their roles and equity clearly documented.

Other business structures

While sole trader and limited company are the most common business structures in the UK, they aren’t the only options out there. There are also two other structures you can go for  — partnership and limited liability partnership (LLP). Here’s a breakdown of what they are and what they entail.

Partnership

This is when two or more people take shared ownership of a business and establish an agreement on how ownership, profits and liabilities are shared between them. Each partner will have to register as self-employed a submit a separate tax return, similar to a sole trader’s tax obligations.

Limited liability partnership (LLP)

A limited liability partnership (LLP) is a business structure that blends elements of both a partnership and a limited company. Like a normal partnership, an LLP is made up of two or more partners, and each partner has limited liability — meaning they’re only responsible for the business’s debts up to the amount they’ve invested or agreed upon.

How to choose the right business structure

Choosing the right business structure is all about balancing risk, control, tax, and future plans. To figure out which one is best for you, you’ll need to think about:

Your risk level

You’ll need to determine whether your business is high risk or low risk. Becoming a sole trader would be the best option if you’re freelancing or running a small-scale side hustle.

On the other hand, a limited company or LLP will give you personal asset protection if you’re dealing with large contracts or hiring staff.

Whether you’re working solo or with others

Are you working alone or with others? If you’re going at it solo, then you can choose either to become a sole trader or set up a limited company. The right choice ultimately depends on how much tax you expect to pay and how much personal risk you’re comfortable with.

On the other hand, if you’re starting a business with a partner, an LLP or limited company is usually the best route. Both structures allow you to clearly define responsibilities, split profits, and put formal agreements in place.

Taxes

For this, you should consider how much you’re earning annually.

For example, if you’re earning under £30,000 a year, the sole trader option would be more straightforward and cheaper tax-wise.

However, if you’re earning above this amount, then a limited company can be more tax-efficient, particularly because of corporation tax and dividend options.

Your personal preferences

Do you want something quick and easy to set up and run? Then becoming a sole trader would involve minimal paperwork and a relatively easy Self-Assessment tax return. Even if you’re not confident about doing taxes, you can always hire an accountant or find accounting software to help you.

However, if you’re comfortable handling a bit more admin in exchange for greater protection and a more professional image, a limited company might be a better fit. While it comes with stricter rules and reporting requirements, it also offers benefits like limited liability and potential tax advantages.

Raising investment and scaling

Want to bring in investors or give out shares? You’ll need a limited company. It’s ideal for startups or businesses planning to scale with external funding.

On the other hand, if you’re happy to stay small, lean, and in full control of your operations, a sole trader or LLP might be a better choice. With more flexibility and fewer formalities, these structures are well-suited to independent businesses or partnerships that want simplicity over expansion.

Your business plans

If you’re just starting out or testing a business idea, becoming a sole trader is a good way to keep things simple and low-cost, and you can always switch to a limited company if things take off later.

But if your goals are more long-term, focused on growth, or you’re planning to eventually sell the business or bring in partners, it’s often better to start with or transition to a limited company from the start.

Next steps

There are many different ways you can set yourself up as a business owner, and each business structure comes with its own benefits and drawbacks.

So, what should you do once you’ve chosen your business structure?

The first step is to register your business with HMRC. If you choose to operate as a limited company, you’ll also need to register with Companies House. Once you’ve completed this, you’ll be officially ready to run your business as you envision it.

Plus, with the right business plan, mindset and drive, any good entrepreneur will be able to navigate the obstacles that come with any of these structures and overcome them to start and run a successful business.