Sole trader vs limited company - what's right for you

Once upon a time, most people starting out in business registered as a sole trader and away they went. Today, it’s easier than ever to register a limited company. So which one is right for you? There are benefits to each, so what’s the difference between a sole trader and a limited company?

Ownership structure

As a sole trader you are the business. Although it’s prudent to manage certain things separately, such as a bank account, as a sole trader you’re entirely responsible for the business. It’ll cease operating when you choose and you alone are accountable for any debts.

Limited companies, on the other hand, are a separate entity. You are a director, shareholder and employee of the business, but the business is not you. Any assets and debts belong to the company. The business cannot simply be terminated when you choose - it must be formally wound up or struck off by Companies House.

Setting up

Setting up as a sole trader is fairly straightforward. You can register as a sole trader online through the HMRC website and will be required to advise them of the nature of the business.

As a limited company director you’ll be expected to register with both HMRC and Companies House, and this process is a little more involved.

Annual reporting

There are also important differences in the kind of information you’ll be required to provide for the authorities. Sole traders and directors of limited companies are both required to complete annual tax returns based on any income and expenditure every tax year. The forms are intended to be simple to fill out and are all available online.

As a limited company, though, you’ll be required additionally to complete and file audited accounts on an annual basis. As well as indicating the financial health of the business, these also show how much money is owed in corporation tax.

Crucially, these accounts must be produced by a professionally qualified accountant, who will require access to thorough financial records. A software platform such as QuickBooks can make keeping such records as simple as possible.

Paying tax

As a sole trader your tax payments are based on your profits after you subtract any costs. Tax is paid in line with the government set income tax bands. You’ll also need to make either Class 2 or Class 4 National Insurance contributions, depending on your total profits.

Also, with MTD for ITSA (Income tax self-assessment) arriving in 2026, you’ll need to keep digital records of all your finances and submit quarterly reports using Making Tax Digital software.

As a limited company your business is liable for tax on business profits, with the tax rate at 19% on profits up to £300,000 (18% from April 2020). As the director of a limited company, your tax position may benefit from a smaller salary and higher dividend payments from profits after tax, which would not be subject to National Insurance.

MTD for corporation tax is also expected to arrive in the near future, which means if you're setting up a limited company in the next few years, it’s wise to keep digital records from the start.

Liabilities

Finally, as we mentioned at the outset, the difference in structure also determines responsibility for any outstanding business liabilities. In the case of sole trader liabilities, all debts of the business belong to the individual.

Limited companies, on the other hand, hold any debts themselves, as opposed to the shareholders. Owners are therefore insulated from being held personally responsible for debts in the case of insolvency.

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

Yes. Changing from a sole trader to a private limited company often happens when sole traders start gaining a good income and have a steady customer base. To make the change you will need to follow the normal process for setting up a limited company as mentioned previously.

You will need to inform HMRC that you are no longer self-employed and let them know how your company is changing.

So, sole trader or limited company?

Overall, operating as a sole trader entails a simpler process. You can get going with the minimum of admin. Thereafter, completing an annual tax return is easy, and you can do this on your own. Just bear in mind that you will take on the risk of being individually responsible for any debts your business incurs.

Limited companies remove the personal responsibility for business debts. You can also minimise your personal tax by paying yourself less salary and greater dividends. However, setting up is a little more complex, and once you’re up and running you’ll need to employ an accountant to produce your annual accounts for Companies House.

The choice is then which suits you best. Either way, using QuickBooks online accounting software can make your life easier, allowing you to devote more time to growing your business.

Do you feel better informed about starting your own company? The QuickBooks Blog covers a wide range of business-related topics – it’s all part of our mission to support small businesses in the UK.

Discover the QuickBooks blog