Sole trader vs limited company – Which is better?

What is the difference between a sole trader and a limited company? 

Understanding the difference between being a sole trader and a limited company is important.

For sole traders, the self-employed business owner and the business is treated as one legal entity, while for a limited company, the business is seen as a distinct legal entity that is separate from its shareholders and directors.  

This means that a sole trader is responsible for both personal and business debts so personal assets such as your house and car could be at risk if something goes wrong. In comparison, a limited company’s finances are separate from the shareholders’ or directors’ personal finances, so they are only responsible for the amount of money that they put into the business.

Paperwork is another key difference. Being a sole trader comes with very few formalities, while limited companies have much more reporting and management responsibilities such as registering with Companies House, filing accounts and adhering to strict record keeping requirements.  

Is it better to be a sole trader or a limited company? 

The business structure that is the best option for you is dependent on your personal circumstances.

There are both advantages and disadvantages to being a sole trader or limited company. 

Sole trader is the easiest business structure to set up. It involves a limited amount of paperwork and obligations, but you might be at a disadvantage when it comes to accessing business finance, benefiting from some tax reliefs and attracting customers. 

Setting up as a limited company is more complicated and involves more costs and paperwork, but it can open you up to many advantages including raising funding, boosting your reputation among customers and can be more tax efficient.  

Advantages of being a sole trader 

Sole trader is the most popular form of business structure in the UK. Official Government figures show that at the start of 2025, 3.2m (57%) of the UK’s 5.7m businesses were sole proprietorships.

The advantages of being a sole trader include:  

• Start immediately: There is no requirement to register with Companies House so you can get going with your business as soon as you want to.
• Very little paperwork: You only need to submit an annual self-assessment tax return and you don’t need to pay Corporation Tax or file company accounts to the Government. There are also minimal record keeping requirements, unlike limited companies which must follow strict record keeping regulations.
• Control over your business: You are the only one in the business so you can make all the decisions without needing to consult shareholders or partners. 
• Keep everything: You run your business as an individual and retain all the profits that you make after you’ve paid tax. 
• More privacy: Your financial information remains private, unlike that of limited companies which is accessible by anyone via Companies House. 

Disadvantages of being a sole trader 

The disadvantages of being a sole trader include: 

• Unlimited liability: You take on all the risks associated with running a business and you hold all the responsibility for its debts. You may need to sell off personal assets such as your house to pay those debts. 
• Limited funding opportunities: Raising business finance can be difficult as lenders and investors tend to favour limited companies. This means the growth of your business could be slower than if you were running a limited company. 
• Less flexibility: Sole traders are taxed on the profits or losses of the sole trade personally, regardless of what profits they physically withdraw from their business bank account. Consequently, when the business is doing well, and you can afford to leave some of the profits in the business, it may be time for you to form a limited company.
• Less credibility: Some organisations choose to not work with sole traders due to the lack of legal protection compared to limited companies.
• No protection over your business name: Unlike limited companies, your business name is not protected. This means anyone can trade under the same name as you which could cause confusion. 

Are limited companies more tax efficient than sole traders?

Previously sole traders were considered less tax efficient than limited companies. However, in recent years corporation tax, dividend income tax and employer’s national insurance contributions (NICs) have all risen, meaning that for many business owners they would now pay more tax as a limited company.

Advantages of being a limited company 

Official Government figures show that at the start of 2025, 2.1m (37%) of the UK’s 5.7m businesses were actively trading limited companies.

The process of becoming a limited company is known as incorporation.

Before setting up as a limited company, it is important to understand the advantages and disadvantages. 

The advantages include: 

• Limited liability: A limited company is legally separate from its shareholders and directors, so you are not personally liable for any losses made by the business.
• More tax flexibility: Running your business as a limited company may qualify for a wider range of allowances and tax deductible expenses. In addition, shareholders can withdraw dividends from the business which typically don’t attract NICs and have a lower income tax rate than a salary - 8.75-39.35% for dividends, compared to 20-45% for salary.
• Funding opportunities: Being a limited company opens you up to more opportunities to access funding. Business finance lenders and investors tend to favour limited companies over sole traders due to the level of legal protection and tax benefits.
• More credibility: Operating as a limited company can encourage more confidence and trust among suppliers and customers. Some businesses prefer to not work with unincorporated businesses.

Disadvantages of being a limited company 

The disadvantages of being a limited company include: 

• More complex to set up and run: Being a limited company involves more paperwork and administration than operating as a sole trader. The actions you need to take include registering with and paying a fee to Companies House, filing annual accounts and confirmation statements with Companies House, filing company accounts and tax returns with HMRC and following PAYE (Pay as You Earn) procedures. All these complexities mean it is advisable to employ the services of an accountant.
• Less privacy: Limited companies have less privacy than unincorporated businesses because the accounts and other documents they file with Companies House are on public record and can be accessed by anyone. 

Can I change from being a sole trader to a limited company? 

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 perfectly possible to make the switch.  

There are various reasons why you might decide to change your business structure to a limited company. They include: 

• Your profits are increasing and you want to take advantage of the greater tax planning opportunities loimited companoes bring.
• You are looking to raise business funding. 
• You want to boost your business’ reputation and image in the eyes of existing and potential customers. 
• You want to bring on board new talent.

Switching from sole trader to a limited company can be a difficult decision, so it’s recommended that you discuss your options with an accountant.

Last updated: 24th February 2026