"Should I go limited?" is one of the most common questions new business owners ask, and one of the most common answers is "it depends". That is frustrating, but it is honest. The right structure depends on your profits, your risks, your plans and how much admin you are willing to take on. This guide explains the real differences between being a sole trader and running a limited company, using HMRC and GOV.UK guidance, so you can have a more useful conversation with an accountant. It is general information, not personal advice.
The short version
GOV.UK says most businesses register as either a sole trader or a limited company. A sole trader is the simplest structure to set up and keep records for. A limited company is a separate legal entity from the people who own it, with more rules and responsibilities. GOV.UK also notes that you can move from one structure to another, and that it is usually easier to move from sole trader to limited company than the other way round.
Being a sole trader
How it works
As a sole trader, you and the business are legally the same. You make all the decisions and keep all the profits after tax. GOV.UK explains you can start trading straight away, but you must register for Self Assessment if you earn more than 1,000 pounds from self-employment in a tax year (6 April to 5 April).
If you need to send a tax return for the previous tax year and have not sent one before, HMRC says you must tell it by 5 October after the end of that tax year, or you could get a penalty.
Tax
- You may pay Income Tax on your profits through Self Assessment.
- You may pay National Insurance contributions depending on your profits.
- You do not pay Corporation Tax.
Liability
GOV.UK is clear that as a sole trader you are personally responsible for all the debts of the business. This is called unlimited liability. If something goes wrong, your personal assets could be at risk, and you may need additional business insurance.
Admin
You must keep records of income and expenses. From the 2024 to 2025 tax year, cash basis is the default method of accounting for the self-employed, which means recording income and expenses when money actually comes in or goes out. Sole traders with qualifying income over certain thresholds are also coming into Making Tax Digital for Income Tax, with quarterly updates through software.
Running a limited company
How it works
A limited company is legally separate from the people who own it and is run by one or more directors. You must register the company with Companies House before you start trading. To set one up you need at least one director, at least one shareholder (who can be the director) and a registered office address, and you must identify any people with significant control.
Tax
- The company pays Corporation Tax on its profits. HMRC sets the main rate at 25% for profits over 250,000, pounds a small profits rate of 19% for profits of 50,000 pounds or less, and Marginal Relief may apply in between. These thresholds are reduced for short accounting periods and associated companies.
- Directors may pay Income Tax and National Insurance depending on how they take money out, for example as salary, dividends or a director's loan.
Liability
GOV.UK explains that company owners are responsible for business debts only up to the value of their financial investment. This is called limited liability. It can offer protection if things go wrong, though you may still need business insurance, and directors have legal duties of their own. In practice, lenders and landlords sometimes ask directors to agree to be personally liable for a company debt, which can reduce that protection.
Admin
Directors take on more responsibilities. According to GOV.UK, these include:
- keeping company and accounting records, generally for 6 years from the end of the financial year they relate to
- confirming Companies House holds the right information through a confirmation statement
- filing annual accounts with Companies House and a Company Tax Return with HMRC
- keeping company finances separate from personal finances, usually with a business bank account
GOV.UK warns that companies can be fined 3,000 pounds by HMRC, or directors disqualified, for not keeping accounting records. Directors can hire an accountant, but they remain legally responsible.
Companies House has also announced that from 1 April 2028 you must use commercial software to file accounts with Companies House.
Privacy
Company details, including directors' names and the registered office address, appear on the public Companies House register. Some people find this a drawback; others see it as adding credibility.
Side by side
| | Sole trader | Limited company | | --- | --- | --- | | Setup | Start trading straight away, register for Self Assessment if needed | Register with Companies House before trading | | Legal status | You and the business are the same | Separate legal entity | | Liability | Unlimited | Limited to your investment | | Tax on profits | Income Tax and National Insurance | Corporation Tax, then tax on money taken out | | Taking money out | Profits are yours after tax | Rules on salary, dividends and loans | | Admin | Lighter | Heavier: accounts, confirmation statement, Company Tax Return | | Public information | Limited | Details on the Companies House register |
Source: GOV.UK business structures comparison.
Questions to ask yourself
These questions do not give you the answer, but they help you and your accountant get there faster:
- What are my expected profits? Tax differences between the two structures depend heavily on profit levels and how you take money out.
- How much risk does my work carry? If something goes wrong, could it lead to large claims or debts?
- Who are my customers? Some larger businesses prefer, or require, suppliers to be limited companies.
- Am I planning to grow, take on staff or bring in investors? A company can issue shares; a sole trader cannot.
- How much admin am I comfortable with? Companies carry more filing deadlines and responsibilities.
- Do I need the money for personal spending straight away? Extracting money from a company follows rules, and tax treatment varies.
Other options
GOV.UK lists other structures too, including business partnerships, limited liability partnerships and social enterprises. If you are going into business with someone else, these are worth understanding.
Choosing your name
Whichever structure you choose, check the name is available and not already a trade mark. Limited companies must follow rules on company names, and sole traders can trade under their own name or a trading name.
Getting the online side right
Your structure affects what you show on your website. Limited companies must display certain company details online, and both structures need a privacy notice if they collect personal data. Our guide on what a small business website needs covers the basics. When you are ready to get online, see our website development page or contact us.
Frequently asked questions
Is a limited company always better for tax?
Not always. It depends on your profits, how you take money out, and your wider circumstances. An accountant can model both options for you.
Can I start as a sole trader and switch later?
Yes. GOV.UK says you can move between structures and that moving from sole trader to limited company is usually the easier direction.
Do I need an accountant for a limited company?
It is not a legal requirement, but directors must keep records and file accounts and returns correctly. Many directors use an accountant to help.
Does a limited company protect my house?
Limited liability means owners are generally responsible for debts only up to their investment, but agreeing to be personally liable for a debt, and directors' duties can change that. Take advice for your situation.
Do sole traders need to register with Companies House?
No. Sole traders register with HMRC for Self Assessment when required, not with Companies House.