Starting a Business in the UK: Sole Trader vs. Limited Company

Starting a business is an exciting venture that comes with a variety of decisions, each influencing the structure and growth of your company.

Two of the most common ways to start a business are as a Sole Trader or a Limited Company. While both options have their advantages and disadvantages, the choice you make will depend on several factors, including your goals, liability, taxes, and long-term plans.

In this blog, we’ll explore the key differences between these two business structures, helping you make an informed decision about which is best for you.

What is a Sole Trader?

A Sole Trader is an individual running a business on their own. It is the simplest and most common business structure in the UK. As a Sole Trader, you are the business—meaning the business’s profits are your personal income, and you are fully responsible for any liabilities.

Key features of a Sole Trader

Ownership and Control: As a Sole Trader, you have full control over the business’s operations. There are no partners, and you make all key decisions.
Liability: One of the major downsides of being a Sole Trader is unlimited liability. If the business incurs debts or legal issues, you are personally responsible, meaning your personal assets (like your home) could be at risk.
Taxation: You pay Income Tax on your profits (above your personal allowance) at standard rates and National Insurance Contributions (NIC). There is no corporation tax to worry about.
Simplicity: Setting up as a Sole Trader is relatively straightforward. You only need to register with HMRC, and your ongoing paperwork is minimal.
Financing: It can be harder to raise capital as a Sole Trader since you don’t have the ability to issue shares, and banks may view the business as riskier, this is also relevant for personal finances (mortgages for example).

When to choose a Sole Trader business

If you are a freelancer, consultant, or someone just starting with a small, low-risk business.
If you prefer simplicity and have minimal paperwork requirements.
If you’re comfortable with taking on personal responsibility for the business’s debts.

What is a Limited Company?

A Limited Company is a separate legal entity from its owners (shareholders). It is governed by its Memorandum and Articles of Association and must adhere to the regulations set by Companies House. In this structure, liability is limited to the amount you’ve invested in the business. So, in the event of financial difficulties or legal issues, your personal assets are typically protected.

Key features of a Limited Company

Ownership and Control: A Limited Company can be owned by one or more individuals, known as shareholders. If you are the sole shareholder, you maintain control, but you can also bring in partners if necessary. The company is managed by directors, who may or may not be the same as the shareholders.
Liability: The key benefit of a Limited Company is that liability is limited to the amount of capital the company has. If the business goes under, your personal assets are generally safe.
Taxation: Limited Companies are subject to Corporation Tax on its profits.
Compliance: A Limited Company has more administrative responsibilities. You need to file annual statutory accounts, company tax returns, and maintain statutory records. This comes with a cost for accounting services.
Financing: Limited Companies have more options to raise capital, including issuing shares or taking on investors. This makes it easier to expand the business and attract investors or partners.

When to choose a Limited Company

If you plan to scale up your business and need protection from personal liability.
If you want the ability to raise capital by selling shares or attracting investors.
If you want to benefit from the tax efficiencies of paying Corporation Tax and receiving a mix of salary and dividends.
If you want to build credibility with clients and suppliers by having a formal, recognised business structure.

Pros and Cons

This table highlights the key differences, making it easier to compare the two options.

Factor	Sole Trader	Limited Company
Setup complexity	Simple to set up, minimal paperwork	More complex setup, requires registration with Companies House
Cost	Low setup and ongoing costs, Free to register with HMRC	Higher setup and ongoing costs (accounting, filing, etc.)
Control	Full control by the individual	Control shared with directors/shareholders
Liability	Unlimited personal liability (personal assets at risk)	Limited liability (personal assets protected)
Accounting	Simple accounts, less paperwork	More paperwork, annual statutory accounts, corporation tax return
Taxation	Taxed on personal income, self-assessment required	Taxed on corporate profits, potential tax advantages (dividends)
Tax filing	Simple self-assessment tax return	More complex tax filing (corporation tax, dividends)
Profit retention	Profits belong to the sole trader, taxed at personal rate	Profits taxed at corporation tax rate; dividends distributed
Credibility	Can appear less credible to customers or lenders, perhaps less professional	Often viewed as more credible and professional, especially by clients and investors
Funding options	Limited, harder to raise capital	Easier to raise funds through shares, loans, or investment
Formalities	Minimal (no annual accounts required)	Must file annual accounts, hold board meetings, comply with regulations
Personal liability	Personal assets at risk	Personal assets protected (company is a separate entity)
Pension contributions	Limited options	Directors can benefit from company pension contributions
Public disclosure	No public disclosure requirements	Accounts and certain details publicly filed with Companies House

Which option is right for you?

The decision between becoming a Sole Trader or forming a Limited Company comes down to your priorities, goals, and the type of business you’re running.

Sole Trader is ideal for small businesses, freelancers, and consultants who want to avoid complexity and need a simple, low-cost structure.
Limited Company is better suited for those who want to grow the business, protect personal assets, and enjoy tax advantages while having the potential to raise external capital.

It’s also worth noting that you can change your business structure as your business grows. You can start as a Sole Trader and, if the business becomes more complex or profitable, switch to a Limited Company later on.

Remember, regardless of your choice, always consult with an accountant or business adviser to make sure you’re making the best decision for your circumstances and long-term goals. Our team can help you with this, you can contact them here.