Sole Trader vs Limited Company: Which Is Best for You?

When deciding between running a small business as a sole trader or setting up a limited company, it is important to know how each legal structure works.

As a sole trader, you and the business are one and the same; you can operate your business under your own name or use trading name of your choice. Sole traders have unlimited liabilities for business debts and you risk personal assets if you run into issues. You will report your income through a self assessment tax return or, from April 2026, Making Tax Digital for Income Tax submissions and pay income tax and national insurance contributions on any business profits.

Working through a limited company is a very different proposition. A company is its own legal entity, which means it is separate from you and therefore directors have limited liability with respect to company debts. The process of setting up a limited company involves you registering the company with Companies House and having to submit annual accounts, corporation tax returns and annual confirmation statements. Shareholders of companies can also choose to pay themselves via dividends as well as through a payroll, offering greater flexibility for tax planning over a sole trader.

The legal status of a sole trader is very different from a limited company. The registration process for a sole trader with HMRC is very simple but, as a sole trader, if the business gets into debt, you can lose your personal assets in order to pay what you owe. This is because you and the business are the same entity and therefore you have unlimited liability for business debts.

A limited company however is separate to its owners and is responsible for its own liabilities. The company is responsible for its own assets, money, and bills meaning as the owner you have limited liability for business debts, protecting your personal assets. The only time you may incur personal liabilities is if you have given a personal guarantee for a debt or fail to fulfil your duties as a limited company director.

There are of course merits to operating as a sole trader, namely simpler taxation reporting requirements.

Limited companies have more complex reporting requirements and tax implications than sole trader businesses. Where sole traders only need to file a personal tax return each year a limited company must file annual accounts, a corporation tax return, and a confirmation statement each year. If you choose to pay yourself a salary from your company you will also need to make monthly payroll submissions to HMRC. Finally, if you are to take dividends from your company you will also need to submit a personal tax return for each year. The cost of an accountant to handle compliance for a limited company can quickly add up when compared to the fees for a sole trade.

That said, limited companies offer much greater flexibility with respect to tax planning and there are numerous ways to ensure both you and your company are tax efficient. Operating through a limited company you can choose to pay yourself via salary, dividends on shares you own, pension contributions or a blend of these. Your accountant will be able to assist you with tax planning and can ensure that you are earning tax efficiently from your business.

Making Tax Digital (MTD) for Income Tax is the next step in the government’s plan to make tax reporting simpler and more accurate. This change will impact sole traders, depending on level of turnover, from April 2026.

MTD for Income Tax rules for self-employed sole traders apply to individuals with turnover in excess of £50,000 from the 6th April 2026 and those with turnover exceeding £30,000 from 6th April 2027. Under the new legislation you will be required to keep digital accounting records and provide quarterly updates and an annual final declaration. These new requirements will greatly increase the amount of work needed for sole traders to remain compliant and may be a factor in looking to begin trading as a company.

If you are interested in learning more about the effect that MTD IT will have on sole traders you can read more on our page for the self employed and MTD IT.

There are several advantages of incorporating your business that we have outlined below. If you would like to discuss how setting up a limited company for your business could benefit you please get in touch with one of our team.

Limited liability is one of the main differences between the two business structures, and is why most people set up a limited liability company. When you set up a limited company, the company becomes a separate legal entity to yourself. It means the business owns its own bank account, business assets and debts; all under the company name. Allowing you to protect your personal assets.

There are still some instances where you may be personally liable for the company’s debts; for instance if you personally assure a business loan or fail to meet your obligations as a director.

Limited companies offer much greater flexibility when paying yourself and open the door for more options when tax planning with your accountant. Sole traders must pay income tax and national insurance on all of their profit in a year and therefore are limited in ways to ensure they are tax efficient.

The profits from a limited company will attract a corporation tax charge but you can include your own salary and some pension contributions in your company’s expenses which will reduce the corporation tax bill. If you are a shareholder you can also choose to pay yourself dividends when your company has sufficient reserves to do so to make use of your dividend allowance and lower rates of tax.

By operating your business as a limited company you will have a greater range of options when looking to plan your earnings. Your accountant will be able to advise you on how best to pay yourself and advise on the implications of other sources of income on your personal tax bill.

At Sherwin Currid we have plenty of experience with helping small business owners make the change to trading as a limited company. All of our clients have a dedicated accountant that can help you with keeping track of your business finances, preparing and submitting financial statements, choosing a company structure and much more.

If you already have, or are thinking of setting up, your own business and would like to discuss what type of business is right for you, please get in touch.