When starting a business, one of the first decisions you’ll need to make is whether to operate as a sole trader or set up a limited company. Both options has its own advantages and drawbacks. From taxation and liability to administrative responsibilities and credibility. Choosing the right option depends on factors like the nature of the your business, your long-term goals and how much risk you are willing to take. Here we will explore the key differences between being a sole trader and running a limited company to help you make an informed decision.
Here are the key differences between operating as a Sole Trader versus a Limited Company, to help you decide which structure best suits your business needs.
1. Business Setup & Registration
- Sole Trader: Register with HMRC for Self-Assessment and keep records of your income and expenses. Your accountant will show you how best to keep these records
- Limited Company: Register with Companies House, set up director(s) and shareholders, and register for Corporation Tax with HMRC. You will still need to keep good books and records
2. Tax & Financial Responsibilities
- Sole Trader: Pay Income Tax and National Insurance via Self-Assessment. Profits are yours to withdraw (you will need to pay tax etc on your profits/income drawn).
- Limited Company: Pay Corporation Tax on profits, and if taking a salary, you may also pay Income Tax and Dividend Tax on earnings. If you do take a salary, you would need a payroll scheme set up and processed – we offer this service.
3. Accounting & Record Keeping
- Sole Trader: Simple accounting; submit an annual Self-Assessment Tax Return to HMRC (from 6 April 2026, Making Tax Digital for Income Tax (MTD ITSA will transform the way self-employed individuals / sole traders manage their tax affairs – check out the details here).
- Limited Company: More formal accounting is required. Limited companies must file annual Company Accounts and Confirmation Statement with Companies House.
- With either option you do need to keep good books and records – this helps to reduce accountancy/bookkeeping costs.
4. Legal & Liability
- Sole Trader: Personally liable for any business debts.
- Limited Company: Separate legal entity, meaning personal assets are protected.
Take advice from professionals
Before deciding to operate as a sale trader or set up a limited company, it is important to seek advice from professionals who can guide you based on your specific circumstances.
Consulting an accountant can help you understand the tax implications and financial responsibilities of each option, while a legal advisor can clarify liability and compliance requirements.
It is worth considering speaking with a business mentor or financial adviser to assess how each structure aligns with your long-term goals.
Taking expert advice early-on, can prevent costly mistakes and ensure you choose the best setup for your business.
Make sure you understand what steps you need to take now to stay compliant and avoid to any penalties. We are here to help support and grow your business by giving you access to experienced accountants, tax advisors and useful information no matter your business size or sector.
Please feel free to contact the team on 01992 444466. We’re accountants for business and we’re here to help you grow.
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