Sole trader vs limited company – pros and cons explained

Setting up as a sole trader is the easiest way to start working for yourself, but it may not be the right choice for everyone.

Alongside its advantages, being a sole trader also has some downsides. Depending on your goals and the nature of your business, a limited liability company might be a better fit for you.

In this guide, we look at the key advantages and disadvantages of both structures to help you choose the right way to trade for your business.

Contents

• Tax differences
• Administration and costs
• Credibility
• Employment status
• Liability
• Advantages of being a sole trader
• Disadvantages of being a sole trader
• When is a limited company better
• Switching later
• Quick comparison table

Tax differences

Limited company taxes

A limited company is a separate legal entity. This means the company pays Corporation Tax on its profits, while directors and shareholders are taxed separately on the money they receive.

• Limited companies pay Corporation Tax on annual profits.
• Directors and employees pay Income Tax and National Insurance on salaries.
• Shareholders pay dividend tax on dividends received from company profits.
• The company itself pays Employers’ NICs on salaries paid to staff.

Company directors often take a small salary and draw the rest as dividends. This mix can be more tax-efficient than paying all income as salary, although the gap has narrowed due to recent increases in dividend and corporation tax.

Read our guide to limited company tax

Sole trader taxes

Sole traders pay Income Tax and Class 4 National Insurance contributions on their business profits. Your total bill is calculated when you file your Self Assessment tax return each year, due by 31 January (GOV.UK).

For example, a sole trader with profits of £40,000 in 2025/26 would pay Income Tax at 20% on most of that amount after the personal allowance, plus Class 4 NICs.

A limited company director making the same profit could potentially reduce their overall tax bill by splitting income between salary and dividends, but accountancy fees and administration costs are higher.

Read our guide to sole trader tax

VAT

Both sole traders and limited companies must register for VAT if turnover reaches £90,000 (2025/26). Voluntary registration is also possible, which allows you to reclaim VAT on business purchases.

Administration and costs

Limited company

Running a limited company involves more paperwork and ongoing responsibilities:

• Register with Companies House and maintain a company register.
• File annual accounts and a Confirmation Statement each year.
• Prepare a Corporation Tax return for HMRC.
• Maintain a separate business bank account.

If you don’t want to handle the incorporation process yourself, an accountant or formation agent can register your company for you. Expect to pay around £150 for this service. The official Companies House fee is £50.

To take money out of a company, you can either:

• Pay yourself a salary, which requires registering as an employer and running payroll with PAYE.
• Declare dividends from company profits, supported by a board minutes and a dividend voucher.

These processes add complexity and usually increase accountancy costs. However, the structure may bring longer-term benefits.

Sole trader

Sole traders have less administration. You must keep records of income and expenses, file your Self Assessment each year, and register for VAT if required.

There is no legal need for a separate bank account, but it is strongly recommended for many reasons.

Credibility

Some industries and clients prefer dealing with limited companies. To secure some kinds of work, being incorporated is a contractual requirement.

If you are a contractor, surveyor, or operate in financial services, you may find it easier to secure work as a limited company.

For local trades, retail, and smaller service businesses, being a sole trader is perfectly normal and rarely questioned.

Employment status

Limited company

A company is a separate legal entity. As a director, you are an officer of the company and may also be an employee. Even if you work alone, you are not considered ‘self-employed’ for tax purposes.

Sole trader

You and your business are the same legal and tax entity. All profits belong to you, but so do all liabilities.

Liability

Limited company

Limited liability means directors and shareholders are usually protected if the business fails. Creditors can only claim against company assets, unless there has been fraud or wrongful trading. See the Companies House blog for more detail.

Sole trader

Sole traders have unlimited liability. If your business runs into debt or faces legal action, your personal assets, such as your home or savings, can be at risk.

Advantages of being a sole trader

• It is simple to set up, with no registration fees.
• Accountancy and compliance costs are lower.
• There is less admin – one tax return each year.
• Your accounts remain private.

Simple and low cost

You can register as a sole trader in minutes, and there is no incorporation fee. Accountants often charge less to prepare sole trader accounts than they do for company accounts.

Less admin

You keep receipts and records, file a Self Assessment return, and pay your tax. Many sole traders use accounting software to save time.

Privacy

As a sole trader, your accounts are private. Nobody can see your earnings unless you choose to share them. Limited companies, by contrast, must file annual accounts which are available to the public online.

Disadvantages of being a sole trader

Unlimited liability is the most significant disadvantage, but there are others:

• Credibility. Some clients and sectors avoid sole traders, particularly those in regulated industries such as finance.
• Finance. It can be more challenging to secure business loans. Lenders may require personal guarantees.
• Tax efficiency. Once profits rise, running a company may reduce your overall tax bill, as you can combine salary and dividends. The tax advantage remains, although it has been reduced in some cases.
• Pensions. Sole traders can save into personal pensions. Company directors can make employer contributions, which are often more flexible.
• Insurance. Sole traders face personal risk, so public liability or professional indemnity insurance is often essential. Limited companies are also required by law to take out Employers’ Liability insurance if they hire staff.

When is a limited company better?

• You need a significant investment in equipment or premises.
• You want external funding or investment.
• Your clients require you to be incorporated.
• You plan to hire employees or grow quickly.
• You want to build a business that can be easily sold or passed on to future generations.

Companies are easier to transfer ownership of compared to sole trader businesses, which usually end when the owner retires or closes the business.

Can you switch later?

Yes. Many people start as sole traders and incorporate once profits grow or client expectations change.

Others may close a company and return to sole trader status if their business becomes simpler or smaller.

Your choice may change as your business evolves.

For tailored advice, always consult a qualified accountant.

Quick comparison table