Sole trader or limited company:
the practical differences

If you’re starting out, or your business is growing, you’ve probably been asked whether you should “go limited”. Which one suits you depends on your profit, your plans and how you want to take money out. Here are the practical differences.

Setting up

Sole trader. You can start trading straight away. You register for Self Assessment with HMRC, and you need to if your trading income is over £1,000 in a tax year.

Limited company. You register the company with Companies House before you start trading. The company has its own name, registered office, directors and shareholders. Directors need to verify their identity with Companies House and get a personal code.

Who owns what

As a sole trader, you and the business are the same in law. You’re personally responsible for all of its debts.

A limited company is separate from you. Your liability is normally limited to what you’ve put into the company. The company’s money belongs to the company: you take it out as salary, dividends or by repaying money you’ve lent it, and each of those has its own rules.

How you’re taxed

Sole trader. You pay Income Tax on your profit, at the same rates as other income. You also pay Class 4 National Insurance: 6% on profits between £12,570 and £50,270, and 2% above that. If your profit is £7,105 or more, Class 2 is treated as paid, which protects your State Pension record.

Limited company. The company pays Corporation Tax on its profit:

Company profit	Rate
£50,000 or less	19%
£50,000 to £250,000	Between 19% and 25%, using Marginal Relief
Over £250,000	25%

You then pay personal tax on what you take out. A salary goes through payroll with Income Tax and National Insurance. Dividends come from profit after Corporation Tax. The first £500 is covered by the dividend allowance, then they’re taxed at 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% above that.

The two routes give different results at different levels of profit, which is why it’s worth running your own figures.

Running it day to day

What	Sole trader	Limited company
Year-end paperwork	Self Assessment return	Accounts to Companies House, Company Tax Return to HMRC, and your own return if you need one
Public record	None	Accounts, directors and shareholders are on the public register
Yearly filing	Return by 31 January	Confirmation statement at least once every 12 months
Payroll	Only if you take on staff	Usually, if you pay yourself a salary
Records kept for	5 years after the 31 January deadline	6 years from the end of the financial year

A company also comes with legal duties for directors, and penalties if accounts or returns are late. The extra admin is real, so count it in when you compare.

Changing later

You can start as a sole trader and move to a company later. The switch raises its own tax questions, such as how equipment and goodwill move across and when your sole trade ends, so plan the date.

What you need to do

• Estimate your profit for the next year or two, as honestly as you can.
• Work out how much you’ll need to take out to live on.
• List the extra admin a company brings and decide who’ll do it.
• Think about risk: contracts, borrowing and whether limited liability matters to you.
• Run the figures for both routes before you register anything.

Key dates

• 5 October: register for Self Assessment after your first tax year as a sole trader.
• 31 January: sole trader return and payment.
• 9 months after the year end: a company’s accounts are due at Companies House.
• 9 months and 1 day after the year end: a company’s Corporation Tax is due.