Sole Trader vs. Limited Company: What’s Best for Your New Business?

Talk to our team

04 February 2025

Starting a new business is an exciting journey, but one of the first big decisions you’ll face is choosing between setting up as a sole trader or a limited company. This choice impacts everything from how much tax you’ll pay to the level of risk you’re personally exposed to. So, which structure is best for your new venture?

The answer depends on several factors—some you’ll know now, and others will emerge as your business evolves. Let’s break it down so you can make an informed decision.

If you need help and advice on business planning our experts are on hand to help.

Liability: How Much Risk Are You Willing to Take?

Sole Trader:

As a sole trader, you and your business are legally the same. This means you're personally responsible for any debts your business can’t pay. Yes, that could include your house or other personal assets if things go wrong. It sounds daunting—and it can be. That's why I always start with liability when helping people decide between a sole trader and a limited company.

Limited Company:

A limited company, on the other hand, is a separate legal entity. This means you, as the owner (or shareholder), have "limited liability." Simply put, if the company runs into financial trouble, your personal assets are generally protected. This legal separation reduces some of the personal risk of running a business.

Tax: How Much Will You Pay?

Sole Trader:

When you’re a sole trader, all the business profits belong to you, and you’re taxed on them as personal income. This means your earnings are subject to income tax at the relevant rates.

Limited Company:

With a limited company, the business pays corporation tax on its profits. You can then take money out of the business through a combination of salary and dividends. Both are taxed, but generally, limited companies benefit from lower tax rates on profits—especially as the business grows. However, whether this works in your favour depends on your personal circumstances, including any other income sources.

Administration: How Much Red Tape Can You Handle?

Sole Trader:

One of the perks of being a sole trader is the simplicity. All you need to do is submit an annual tax return (assuming you’re not VAT-registered and don’t employ staff).

Limited Company:

Running a limited company comes with more paperwork. You’ll need to file accounts with Companies House, submit a company tax return to HMRC, and handle payroll if you’re paying yourself a salary. Plus, there are board meetings, even if you're the only director, and dividend vouchers to support any payouts. All of this means higher accountancy costs and more time spent on admin.

Prestige: How Does Your Business Look to Others?

Sole Trader:

While there's nothing wrong with being a sole trader, some customers—especially larger organisations—may prefer working with a limited company. There's often a perception that a limited company is more established and trustworthy.

Limited Company:

If you plan to work with bigger clients, it’s worth considering that some may only work with limited companies. So, even if you're just starting out, it might be worth setting up a limited company to enhance your business's image.

Investment & Funding: How Will You Finance Growth?

Sole Trader:

If you need external investment as a sole trader, your options are limited. You may need to rely on personal savings, loans from banks, or help from friends and family. You can't sell shares in your business because, legally, the business is just you.

Limited Company:

A limited company can raise money by selling shares, making it easier to attract investors. This could be a big advantage if you're looking to grow quickly or secure larger sums of funding.

Continuity: What Happens When You Want to Exit?

Sole Trader:

If you're a sole trader and decide to stop trading, the business ends. You can’t pass it on or sell it as a complete entity. You can only sell the assets or goodwill of the business.

Limited Company:

With a limited company, the business can continue even if you step away. You can sell shares, bring in new partners, or pass ownership to someone else. This offers more flexibility for continuity or sale.

Responsibilities: What Are Your Legal Obligations?

Sole Trader:

As a sole trader, you have fewer legal responsibilities. You won’t need to comply with the Companies Act, which governs the operation of limited companies, meaning there’s less regulation to worry about.

Limited Company:

Directors of limited companies have several legal obligations under the Companies Act. These include submitting annual accounts, filing a confirmation statement, and ensuring the company remains compliant with all legal requirements. Non-compliance can result in fines, disqualification as a director, or even imprisonment in extreme cases.

Taking all these factors into account, here’s a simple, side-by-side summary of the advantages and disadvantages of a sole trader and a limited company:

Sole Trader: Advantages and Disadvantages

Advantages	Disadvantages
Easy to set up and run – Minimal paperwork and no need to register with Companies House.	Unlimited personal liability – You are responsible for all business debts, putting personal assets (like your home) at risk.
Full control – You make all the business decisions.	Higher personal tax rates – Profits are taxed as income, which can be more expensive as the business grows.
Lower costs – Fewer administrative costs, such as lower accountancy fees.	Limited credibility – Some customers or clients may prefer to work with a limited company.
Fewer regulatory requirements – No need to comply with the Companies Act.	Harder to raise funds – Limited options for external investment, such as selling shares.
Profits are yours – You keep all business profits after tax.	No continuity – The business ends if you stop trading; harder to sell or pass on.

Limited Company: Advantages and Disadvantages

Advantages	Disadvantages
Limited liability – Your personal assets are generally protected if the business fails.	More paperwork and regulation – You'll need to comply with the Companies Act, file annual accounts, and deal with more admin.
Lower tax rates – Companies often pay less tax on profits compared to sole traders, especially as the business grows.	Higher accountancy costs – Running a limited company usually comes with increased costs due to compliance and reporting.
Credibility and prestige – Many clients and larger organizations prefer working with limited companies.	Less personal control – Legal requirements for directors can restrict some decision-making freedom.
Easier to raise funds – You can issue shares, making it easier to attract investors.	Profits belong to the company – You must pay yourself a salary or dividends, which are taxed separately.
Business continuity – The company can continue to operate even if you step away or sell your shares.	Director responsibilities – Directors have strict legal obligations, and non-compliance can lead to fines or penalties.

Final Thoughts: What’s Best for You?

Choosing between a sole trader or a limited company isn’t a one-size-fits-all decision. It comes down to your unique circumstances—how much risk you’re comfortable with, your tax situation, and even how your customers or investors perceive your business.

Getting the structure wrong from the start isn’t the end of the world, but it can be costly to fix later. That’s why it’s worth taking the time to get expert advice. If you're unsure which route to take, contact us today to discuss what might be best for your business. We can help you make the right choice for now and in the future.