Sole Trader vs Limited Company: How to set up a business.
Fri, 18 April 2025 by James Green
Summary:
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When starting or growing a business, one of the most important decisions you’ll make is choosing your legal structure. Should you continue operating as a sole trader, or is it time to register as a limited company?
Each option comes with its own advantages — from tax implications and personal liability to credibility and access to funding. In this guide, we break down the key differences to help you decide which structure best suits your business goals.
As of early 2023, the UK private sector comprised approximately 5.6 million businesses, reflecting a modest increase from the previous year. Of these, about 3.1 million (56%) were sole proprietorships, and 2.1 million (37%) were actively trading companies. GOV.UK
The growth in the small and medium business population indicates a continued interest in entrepreneurship, driven by factors such as financial incentives and personal aspirations.
The most prevalent business structures remain sole traders and limited companies. Each offers distinct advantages and considerations. To assist you in making an informed decision, we’ve compiled a comprehensive guide detailing the processes of setting up as a sole trader or forming a limited company, including the benefits and potential drawbacks of each structure.
How to set up a business
What is a limited company?
A limited company is a private company (private limited company) where the business owner is only liable for the amount of money they invest. Meaning, that the business owner has limited liability which helps protect their personal assets and finances should they fall into company debt.
How to set up a limited company
Follow the simple steps.
- Navigate to our sister site: SME Formations
- Choose a name for your business: Ensure that you follow the specifications of Companies House so that your business’ name adheres to the rules.
- Choose your director(s) and company secretary: Your business must have an appointed director. However, it is not required that you have a secretary.
- Assign your shareholders and people with significant control: A limited company must have at least one shareholder. A director can also be a shareholder. People with significant control are defined as anyone who has voting rights or owns over 25% of the company’s shares.
- Prepare a memorandum and articles of association: Upon formation, your articles are automatically prepared and sent to you
- Learn, understand and check what records must be kept: SME Formations will send reminders ahead of dates for submitting Accounts, confirmation statements etc.
- Register your new company with Companies House: You will be instructed to provide a registered office address. You will also have to provide a SIC code which identifies the nature of your business.
What is a sole trader?
A sole trader is where an individual runs their own business and is considered self-employed. The individual has absolute control of their business, including its assets and its profits after tax. A sole trader is personally liable for the business’s debts, meaning personal finance and assets are at risk.
How to register as a sole trader
To set up as a sole trader in the UK, you need to alert HM Revenue and Customs (HMRC) and register for Self Assessment. You will then have to file a tax return every year. Your responsibilities will include:
- Keeping records of your business’s sales and expenses.
- Sending a Self Assessment tax return every year.
- Paying Income Tax on your profits and Class 2 and Class 4 National Insurance.
To further check the rules, seek the government’s step-by-step guide.
What is the difference between a sole trader vs. a limited company?
The most considerable difference between a sole trader and a limited company is that a sole trader consists of one individual who is personally liable for the business. In contrast, a limited company is an entity in its own right and can have multiple owners who have limited liability.
How to set up a business | Getting the right help
Despite reading through the government guides and rules, creating a business can still be very confusing and overwhelming if you lack the experience. However, there are professionals at hand who have experience in helping entrepreneurs create their own businesses.
SME Formations
SME Formations is one of the UK’s leading online company formation agents in the UK. Although that title seems complicated, it means that they’re one of the best when it comes to helping entrepreneurs set up a new business. SME Formations can provide quick and simple online incorporation in as little as 3 hours.
They offer numerous packages to help entrepreneurs incorporate their companies. We’ve listed the most popular packages that 1st Formations offer.
Launch Package – £54.99
The launch package is the most basic of the services that are provided. Nonetheless, it still includes everything you need to get your business started.
- Incorporation of your private limited company with Companies House (including an email copy of your Certificate of Incorporation).
- Free business bank account.
- Free online company manager.
- Free domain name (.com or .co.uk).
Premier Package – £64.99
The privacy package was created to protect the privacy of your home address. If you don’t have a trading address, your home address is used instead. As Companies House is public, it means that your home address is public to anybody who wants to know more about your company. So, this package is for you if you’re concerned about protecting your privacy.
The Privacy Package includes:
- Everything included in the digital package
- Email copy of the company register with first entries.
- Registered office service based in London (WC2) for 12 months.
- One service address in London (WC2) for 12 months.
So if you’re looking for a quick and easy way to set up your limited company, then SME Formations is the place to go. If you’re still unsure about forming a new company on your own, we also provide a customer support number and dedicated formation agent to guide you through the process – 0330 127 7911
If setting up a business seems right for you, then check out our next section where we look at the advantages and disadvantages of sole traders and limited companies. We then compare both business types, so you can see how they compare on matters you care about.
What are the advantages and disadvantages of a sole trader?
Advantages
1. Complete Control
As a sole trader, you are the boss. Being self-employed allows sole traders to maintain full control of the business, meaning that you can run the business how you want to. There is no influence or bothersome interference from other owners or stakeholders; you make the final decisions.
Having complete control over a business is one of the critical factors for why people become sole traders, as it gives them greater flexibility of running a business.
2. Keep all of your profits
As a sole trader, you can keep all of your business profits after you have paid tax on them. Unlike a partnership business structure where you would have to share profits, as a sole trader, you’re able to keep all of your profits in their entirety. A higher profit margin is an enticing factor for those who are interested in the monetary rewards of becoming a sole trader.
3. Cheap startup costs
Registering with HMRC is free, therefore setting up and registering as a sole trader is very affordable. Sole traders do not have to register your new business with Companies House, which charges a fee for registering limited businesses.
The additional benefit of not having to sign up with Companies House is that you uphold maximum privacy. Your business details and directors details will not be stored on Companies House’s public database.
4. You can change your mind easily.
People that choose to become a sole trader usually start part-time. They can remain employed and earn money whilst their business begins to find its feet. Once they’re comfortable with the money their sole trader business is providing, they can go full time.
Furthermore, you can still quickly form a limited company as your sole trader business begins to expand and grow. This allows for flexibility and doesn’t seem like such an overwhelming process.
Disadvantages
1. Unlimited Liability
One of the key disadvantages mainly associated with being a sole trader is that you have unlimited liability for your business. Should you owe any debt or a claim is made against your business, your personal assets and finance are at risk.
In a worst-case scenario, this means that you could lose your income and your personal assets, such as your home or car, potentially bankruptcy. There can be little financial protection as a sole trader.
2. Tax limitations
Sole traders are not the most tax-efficient business when compared to limited companies. The more profits you earn as a sole trader, the higher rate of tax you will have to pay proportionally. Therefore, sole traders generally have less flexibility of being able to maximise profits in comparison to limited companies.
3. Problems with securing funding
Securing funding as a sole trader is usually tricky as most traditional lenders, such as banks, are less inclined to offer loans. Sole traders are considered risky due to their business structure, so are often lent less money. It may lead to shorter repayment periods and higher interest rates.
Traditional banks generally prefer more transparency when lending money or looking to invest, to better understand how their money is being spent. Therefore, the private nature of sole traders makes banks more sceptical about lending money.
It is important to note that banks still do lend money to sole traders, it’s just that usually a smaller amount, has a shorter repayment period and can come with higher interest rates. Alternatively, you could apply with an alternative lender to secure sole trader funding or a business loan.
4. More responsibility = More work
As a sole trader, you undertake every aspect of the business, including making the big decisions which ultimately decides whether you earn money or not. As most people want to generate a profit, it requires more oversight and more work which can often strike a poor work-life balance.
Many sole traders may not want to lose business, so they can be more reluctant to take a holiday. Furthermore, nobody is paying for your holiday if you’re a sole trader, which is also another reason why someone running the business as an individual may be less inclined to stop working.
What are the advantages and disadvantages of a limited company?
Advantages
1. Limited Liability
The limited liability of running a limited company is a benefit for many owners. Limited liability ensures that a business owner’s personal assets are protected should their business incur debts. Therefore, you are not required to hand over a house or car if your business racks up a high amount of debt.
It allows business owners to choose whether they wish to use their personal assets to pay off debts should it come to that situation. The limited liability of a limited business offers protection for business owners and directors unless they commit fraud.
2. Greater tax efficiency
Limited companies are very tax-efficient, which is a big reason why someone may opt for a limited business model. Of course, limited companies still pay tax, but the tax rates they pay can be more flexible. Limited businesses usually take the maximum amount of profit that hasn’t been taxed.
The tax advantages of a limited company are an influencing factor for those who wish to utilise them. It is always advisable to speak to a professional to meet regulation criteria before making the most of limited company tax rates.
Below is a table showing how much you can save as a limited company in compared to a sole trader.
| Annual Profits | Sole Trader – Total Tax and NI Payable | Ltd Company – Total Tax Payable | Money Saved as a Ltd Company |
|---|---|---|---|
| £20,000 | £2,603.60 | £2,383.01 | £220.59 |
| £30,000 | £5,503.60 | £4,890.51 | £613.09 |
| £45,000 | £9,853.60 | £8,651.76 | £1201.84 |
| £60,000 | £15,503.60 | £12,480.44 | £3,023.16 |
*These numbers are based off Companies Made Simple tax comparison calculator.
3. Professionalism
Limited companies are often treated with much more prestige. In some industries, having a limited company reflects a more professional image because it is registered as part of Companies House. Although not always the case, some big businesses prefer to work with limited companies over other business types.
As a limited company, your business name is protected by law, meaning that no other company can have the same business name as yours. It ensures that your business is entirely individual and means nobody can damage your image by trading under the same name.
4. Raising funding
Securing funding or raising capital as a limited company can be an easier route than a sole trader. Limited companies can offer shares, providing capital for the business to expand. These shares are available to current shareholders or new investors.
Also, limited companies can still borrow money from banks. It means that business owners and company directors have more options to choose from when looking for further investment in their business.
Disadvantages
1. Greater complexity
Setting up and running a limited company can be quite confusing for new business owners as it has a more complicated business structure compared to sole traders. It takes more steps to set up and requires registration/incorporation with Companies Houses, which costs a small fee, and requires much more administration.
Furthermore, the account structure of a limited company is also very complicated, with many directors hiring professional accountants to take care of tasks such as tax returns and updating monthly and annual accounts. Hiring an accountant will cost money, but if account reports are not filed correctly or regularly kept up to date, companies can face penalties from HMRC.
2. More costs
The greater complexity of a limited company generates more accountancy and administration procedures. This work is likely to be outsourced to ensure that it adheres to rules and regulations. More administration will likely result in the company having to pay fees to accountants or legal consultants.
3. Lack of Privacy
Limited companies have to be registered with Companies House, which is accessible by anyone via the Companies House public database. There are many details included, such as company accounts, personal details and company structure, i.e. directors, shareholders and persons of significant control.
For those who are looking are concerned about maintaining their privacy, running a limited company will compromise this.
4. Lack of total control
If your limited company has other directors or other shareholders, you will need to accommodate their views and opinions during decision-making processes. The more significant share in the company that an individual has, the more influence they can dictate. If they have a more substantial share than you, they have greater ownership.
If you are the sole shareholder, this means that you own 100% of the company. However, many limited companies have multiple shareholders to help secure funding and to split the workload. So, as your company expands, bringing on an additional shareholder may be necessary.
Should I setup as a sole trader or limited company?
Comparing a sole trader vs. limited company in detail
Deciding what business type is better is ultimately down to opinion and circumstance. It is a decision that should be thought about carefully, and the pros and cons should be weighed up for both sole traders and limited companies. Some points will outweigh other, and it’s down to your discretion to decide what is better for your situation.
Building upon the previous information provided in our infographic, we have put together a more detailed comparison table below.
| Limited Company | Sole Trader | |
|---|---|---|
| Liability | A limited company has limited liability as the company is a separate entity from the business owners, which offers more protection. | A sole trader has unlimited liability, so the business debts become the business owner’s personal debt, potentially putting personal assets at risk, such as a home or car. |
| Ownership | A limited company may have more than one business owner, so will have to consult with other directors or PSCs before making decisions. This means that you may have less control. | As a sole trader, you are the sole owner of your company. Allowing you to have full authority over your business operations. |
| Tax | Limited companies are more tax efficient. It allows the business owner to maximise their profits whilst also paying the correct amount of tax. | Sole traders have greater tax limitations, often having to pay more tax as their profits increase. They also have to pay national insurance. |
| Securing Funding | Limited companies are considered more prestigious and credible, which can help them receive funding easier from traditional lenders. Limited companies can also offer shares of the company in return for investment. It provides a more flexible way of securing finance to expand a business. | Sole traders may find it harder to be accepted for business financing from traditional lenders due to their business structure, i.e. private finances. It could lead to smaller loan amounts. Some industries may not be inclined to work with sole traders, which can sometimes limit business opportunities. |
| Starting a business | Starting a limited company is a more complicated and complex process. It requires much more administration and is a longer process. The complexity requires more filing of company accounts and business details. It can include having to outsource work to professionals such as accountants and legal consultants to ensure you follow the rules. | Starting as a sole trader in the UK requires you to register with HMRC and to register for self assessment. It will require you to file a tax return annually. Additionally, you need to keep records of your business’ sales and expenses and have to pay income tax on your profits and National Insurance. |
Final Word
Deciding to become self-employed or to start a business is a big step for an entrepreneur to take, and it takes years of hard work. So, it’s always an idea for an entrepreneur to have a well researched and developed plan before they start a business from scratch. You could try talking to entrepreneurs who have experience creating a business or speaking to a business consultant.
If you need help setting up your business, contact our sister company, SME Formations. They specialise in helping entrepreneurs set up limited companies, as well as offering a host of accountancy services to help your business perform at its best.
Frequently Asked Questions
A private limited company is a type of limited company. A private limited company does not publicly trade its shares on a stock market, unlike a public limited company. The shares are instead controlled by internal shareholders who make decisions on how the company is run, which is dependent on the size of their shares.
A sole proprietorship is also known as a sole trader. There is no distinction between the business owner and the business, meaning that the owner is fully liable for the debts the business accrues. It also means that the owner can keep all profits after tax. In addition, there are also specialist financial products for businesses during COVID. These include business credit cards, research and development tax relief, equipment finance, invoice finance, credit checkers, and more.
Becoming a limited company is ultimately down to your personal situation and preference, as well as the industry you’re looking to go into. Nonetheless, forming a limited company comes with some benefits, including limited liability, tax advantages and more prestige.
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