Contact Us

Here, we outline the pros and cons of being a sole trader and a limited company to assist you in making your decision. Speaking to you accountant will also help, our accountants are experienced and will be able to advise you. 

What are the differences between a sole trader and a limited company?

Sole trader 

A sole trader is a self-employed individual trading as a business on their own. The individual and the business are one entity. There is no requirement for formal registration with Companies House

Limited company 

A limited company is a separate legal entity. It operates independently from its owners and the earnings of the Company belong to the company, not to individuals. 

Which is better – sole trader or limited company?  

The best option for you will depend on your circumstances, the size of the business and future plans. 

Both structures have their pros and cons and speaking to your accountant will be crucial in making an informed decision on sole trader vs limited company.

Sole Trader

Pros Cons
Easy to set up
There’s no need to register with Companies House. 
Unlimited liability
You take on all the risks and liabilities of covering business debts. 
Fewer reporting obligations
You’ll need to submit an annual self-assessment tax return to HMRC but there’s no need to file your accounts formally. 
Less tax effiicient
Sole traders pay income tax at a higher rate than corporation tax, as well as National Insurance. Sole traders are taxed on business profits. 
Business control
Business decisions are yours. 
Limited funding opportunities
Lenders and investors may favour limited companies so raising finance to grow your business can be difficult. 
Keep all profits
You’ll retain all the profits after tax. 
Less credibility
Some organisations may prefer working with limited companies. 
More privacy
Business finances aren’t disclosed anywhere. 
No business name protection
Your business name is not legally protected. 

Limited company

Pros Cons
More tax efficient
Limited companies pay corporation tax at a lower rate than income tax. Business owners and directors are taxed on income extracted from the company. 
Reporting obligations
Companies must file accounts to Companies House and HMRC. A Company Tax Return must also be submitted to HMRC. A Confirmation Statement and record of Persons with Significant Control must also be reported to Companies House. 

Limited liability

Owners are not personally liable for business losses.

Less control

Control is shared with shareholders and decisions may need a vote.

Funding opportunities

Lenders and investors tend to favour limited companies due to the level of legal protection and tax benefits.

More complex to set up

Involves more paperwork and administration, including registering with and paying a fee to Companies House.

More credibility

Operating as a limited company instils confidence and trust among suppliers and customers.

Less privacy

Accounts and other documents filed with Companies House are on public record.

Need help choosing the best structure for your business?

Contact TaxAssist Accountants for a free, no-obligation consultation.

0117 4523 523

Or contact us

Profit extraction – how to pay yourself

Sole trader

Business profits are taxed as personal income regardless of how much you take out of the business. The amounts you do take out are drawings, and you are not taxed on these.

Limited company

Business owners are taxed on income extracted from the company, often in the form of dividends.

Tax rates

As mentioned above, there are tax differences between the business structure type. Here we’ve summarised the 2024/25 tax rates for sole traders and limited companies.

Sole trader

England, Wales and Northern Ireland (2024/25)

Band Taxable income Tax rate
Personal Allowance Up to £12,570 0%
Basic rate £12,571 to £50,270  20%
Higher rate £50,271  to £125,140  40%
Additional rate Over £125,140 45%

Scotland (2024/25) 

Band Taxable income Tax rate
Personal Allowance Up to £12,570 0%
Starter rate £12,571 to £14,876  19%
Basic rate £14,877  to £26,561  20%
Intermediate rate £26,562  to £43,662 21%
Higher rate £43,663 to £75,000 42%
Advanced rate £75,001 to £125,140 45%
Top rate Over £125,140 48%

Limited company

Profit banding Corporation tax rate
Under £50,000 19% small profits rate
Over £250,000  25% main tax rate
Between £50,000 and £250,000   25% main tax rate less marginal relief

Need support with your start-up?

Contact TaxAssist Accountants for a free, no-obligation consultation.

0117 4523 523

Or contact us

Frequently Asked Questions

Disadvantages include unlimited liability for business debts and potentially this structure may be less tax efficient. 

The advantages include no formal registration and fewer reporting obligations.

The better option depends on individual circumstances. There’s no one size fits all approach, instead you’ll need to balance the pros and cons to establish what’s right for your business. 

The main difference is that owners of limited companies have limited liability and risk, whereas sole traders hold all the risk and liability. Additionally, limited companies have more reporting obligations. 

Being a sole trader is a good option for many small business owners and self-employed people starting their own venture as it’s the easiest business structure to set up. However, there may become a point when you decide it’s better to be a limited company and it is simple to make the switch.   

Date published 19 Jan 2024 | Last updated 29 Aug 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

Catherine Heinen, FCCA

Catherine is a Technical Content Writer at TaxAssist Accountants, and a qualified accountant. With experience working at two accountancy practices in the UK top 50 accountancy firms according to Accountancy Age, Catherine has significant experience in accounts, tax returns and advising clients. Catherine ensures businesses, business owners and individuals are kept up to date and informed by providing concise and informative technical material.

Choose the right accounting firm for you

Running your own business can be challenging so why not let TaxAssist Accountants manage your tax, accounting, bookkeeping and payroll needs? If you are not receiving the service you deserve from your accountant, then perhaps it’s time to make the switch?

Local business focus icon

Local business focus

We specialise in supporting independent businesses and work with 100,000 clients. Each TaxAssist Accountant runs their own business, and are passionate about supporting you.

Come and meet us icon

Come and meet us

We enjoy talking to business owners and self-employed professionals who are looking to get the most out of their accountant. You can visit us at any of our 409 locations, meet with us online through video call software, or talk to us by telephone.

Switching is simple icon

Switching is simple

Changing accountants is easier than you might think. There are no tax implications and you can switch at any time in the year and our team will guide you through the process for a smooth transition.

See how TaxAssist Accountants can help you with a free consultation

0117 4523 523

Or contact us