Sole Trader vs Limited Company: Which Is Right for Your Business?

byDaniel Greenaway/20th January 2025/inLimited Company, Running a business

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Starting a business in the UK comes with an important decision: should you operate as a sole trader or form a limited company? Each structure has its own advantages, disadvantages, and legal implications. At Accounting Wise, we’ll break down the differences to help you choose the right one for your business.

What Is a Sole Trader?

A sole trader is the simplest business structure. You operate as an individual, and there’s no legal distinction between you and your business.

Advantages:

- Easy and inexpensive to set up.
- Full control over decision-making.
- Simpler bookkeeping and tax requirements.

Disadvantages:

- Unlimited liability: you are personally responsible for business debts.
- Less credibility with clients and suppliers.
- Taxed as personal income, which may be less efficient as profits grow.

What Is a Limited Company?

A limited company is a separate legal entity, distinct from its owners (shareholders). It requires registration with Companies House and is subject to stricter regulations.

Advantages:

- Limited liability: your personal assets are protected.
- Potential tax efficiency through dividends and corporation tax.
- Greater credibility and professional image.

Disadvantages:

- More complex and costly to set up.
- Stricter reporting and compliance requirements.
- Annual accounts must be filed with Companies House, making financials publicly accessible.

Limited Company Accounting Packages

Limited Company Accounting Services

Your very own expert Sole Trader Accountant

Sole Trader Accounting Services

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Feature	Sole Trader	Limited Company
Liability	Unlimited liability	Limited liability
Taxation	Income Tax on profits	Corporation Tax and dividends
Setup Costs	Minimal	Registration and admin costs
Compliance	Simple self-assessment tax return	Annual accounts and compliance
Credibility	Lower	Higher

Feature

Sole Trader

Limited Company

Liability

Unlimited liability

Limited liability

Taxation

Income Tax on profits

Corporation Tax and dividends

Setup Costs

Minimal

Registration and admin costs

Compliance

Simple self-assessment tax return

Annual accounts and compliance

Credibility

Lower

Higher

Tax Considerations

Sole Traders:

Profits are taxed as personal income under Income Tax rates (20%–45%).
Subject to National Insurance contributions (Class 2 and 4).

Limited Companies:

Profits are taxed at the Corporation Tax rate (currently 25% in 2024). The 19% small profits rate will be payable by companies with profits of £50,000 or less. Companies with profits between £50,001 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective Corporation Tax rate.
You can pay yourself a combination of salary and dividends, which can reduce personal tax liability.

How Accounting Wise Can Help

Still unsure whether to choose a sole trader or limited company structure? At Accounting Wise, we provide expert advice tailored to your business goals. From helping you register to managing tax compliance, we ensure your business operates efficiently.

The choice between sole trader vs limited company depends on your business size, goals, and risk appetite. By understanding the key differences and tax implications, you can make an informed decision.