Guide · Company formation
Sole trader vs limited company: which should you choose?
Sole trader is the simplest way to trade. A limited company is a separate legal person that shields your personal money from business risk. The right answer depends on your liability exposure, your clients, and where the profits are heading.
The comparison that actually matters
| Sole trader | Limited company | |
|---|---|---|
| Liability | Unlimited — business debts are personal debts. | Limited to what you put in, if you trade properly (no wrongful trading, no personal guarantees). |
| Set-up | Free; register for Self Assessment with HMRC. | £100 Companies House fee; directors verify identity; a day of admin done properly. |
| Ongoing admin | One tax return a year. | Annual accounts, £34 confirmation statement, corporation tax return; most pay an accountant £300–£1,500/yr. |
| Tax shape | All profit taxed as your income, in the year it arises. | Corporation tax on profits (19–25%); personal tax only on salary/dividends you take out. |
| Privacy | Nothing on a public register. | Company details, directors and accounts publicly searchable — use a service address, not your home. |
| Credibility | Fine for consumer work; some agencies won’t engage sole traders. | “Ltd” + a Companies House number reads as established; many B2B clients require it. |
When sole trader is the right call
- Low risk, low overhead. Freelancing or side income where a worst-case dispute is an unpaid invoice, not a lawsuit.
- You spend what you earn. If every pound of profit becomes personal income anyway, the company’s retain-and-reinvest advantage is worth little.
- Testing an idea. Nothing stops you incorporating later once the idea proves out — it is just more admin than starting with the end structure.
When the limited company wins
- Real liability. Client work that could go wrong expensively, premises, employees, stock, debt — the company keeps a business failure from becoming a personal one.
- B2B clients and agencies. If the customers you want insist on contracting with a company, the decision has been made for you.
- Growth plans. Retaining profit for reinvestment, bringing in a co-founder or investors, or building something you might one day sell — all need the share structure only a company has.
- The brand test. Registering the company also protects the name on the register — no one else can incorporate under it.
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See launch packages →Frequently asked questions
What is the actual difference between a sole trader and a limited company?+
A sole trader is you, trading. There is no legal separation: business debts are your debts, and business income is your income, taxed through Self Assessment. A limited company is a separate legal person — it owns the business, signs its contracts and carries its debts, while you own shares in it and are normally a director. That separation is what everything else (liability, tax treatment, admin, credibility) flows from.
Which pays less tax in 2026?+
It depends on profit level and how much you take out. Sole-trader profits are taxed as personal income in the year they arise. A company pays corporation tax (19% small-profits rate rising to 25% at higher profits), and you then pay personal tax only on what you extract as salary or dividends — money left in the company for reinvestment is not taxed on you personally. At modest profits the gap is small and sometimes favours the sole trader once accountancy costs are counted; as profits grow, or if you retain earnings, the company usually pulls ahead. Run the numbers for your own situation or have an accountant do it — the crossover point moves with each Budget.
What does each cost to set up and run?+
Sole trader: free to register with HMRC, one Self Assessment return a year. Limited company: £100 Companies House incorporation fee, a £34 annual confirmation statement, annual accounts, and typically £300–£1,500 a year for an accountant. The company costs more to run — that premium buys the liability shield and the tax flexibility.
Do clients and agencies care which one I am?+
Often, yes. Many agencies and larger clients will only contract with a limited company, both for professional-image reasons and because of the tax rules around engaging individuals. If your target customers are businesses rather than consumers, a company usually removes friction; for consumer work the difference matters less.
What goes on the public record if I incorporate?+
The company name, registered office address, directors (with a service address and month/year of birth), people with significant control, and your filed accounts and confirmation statements — all free to search on the Companies House register. Since November 2025 directors must also verify their identity. Use a registered-office service rather than your home address, because the register’s filing history is permanent.
Can I start as a sole trader and switch to a company later?+
Yes, and many founders do. Incorporation later means transferring the business into the company, telling HMRC, moving contracts and possibly re-registering for VAT — all manageable, but more admin than starting with the structure you will end up needing. If you already know you will want the company (client requirements, liability exposure, plans to hire or raise), starting with it is usually cheaper than converting.
This guide is general information, not tax or legal advice, and reflects the rules as we understand them in 2026. Tax rates, thresholds and reliefs change with each Budget — confirm current figures on GOV.UK or with an accountant before deciding.