When registering your business in the UK, one of the key decisions you’ll face is choosing the right business structure. Each option—sole trader or limited company—comes with its own set of advantages and disadvantages.
For instance, registering as a limited company might feel safer as it offers limited liability in case the business runs into trouble. However, it also comes with more responsibilities compared to operating as a sole trader. On the other hand, becoming a sole trader is often simpler, easier to set up, and more straightforward to manage.
Choosing between a sole trader & limited company isn’t always easy. It depends on your circumstances, goals, and preferences. Read on as we break down the main differences between them to help you make an informed decision.
Sole Trader: What is it?
A sole trader is a self-employed individual in the UK who runs their own business and has full control over its operations, profits, and losses.
It’s their personal venture, where they are the sole owner, decision-maker, and driving force behind everything. Sole traders set their own schedules, manage the entire workflow and revenue, negotiate directly with clients, and handle their own taxes by completing a self-assessment with HMRC at the end of each tax year.
This is one of the simplest and most popular business structures in the UK. Many choose it for the freedom and flexibility it offers—the ability to decide what kind of work to take on and how to run things.
To get started as a sole trader, you must register your business with the UK government. Once registered, you’re responsible for complying with HMRC’s tax regulations and filing requirements.
Pros & Cons of Sole Trader
| Pros | Cons |
➸Being a sole trader is relatively easy—it involves registering with HMRC and filing an annual self-assessment tax return.You are the boss, and every decision is yours. ➸The business structure is versatile and flexible, shaped entirely by how you want to run it. Just make sure you submit taxes and file returns on time. ➸You’re not required to make your business details public. Everything can remain private and confidential. ➸You do not have to pay any Corporation Tax. | ➸The tax rate is directly dependent on the revenues you earn. ➸If you want investment, you may find it difficult to get banks and financial institutions interested in sole trader entities. ➸As the business owner, you have whole and unlimited liability. There is no legal distinction between the business & the owner. Your personal assets will be at risk as they will be used to pay off debts. |
Limited Company: What is It?
This is a registered business entity that has its own legal existence. This means that the financial risks and security are tied to the business itself and not to the owners.
Limited companies must also register their business with the UK Government. In addition, they are expected to follow policies that ensure business transparency and comply with HMRC rules.
Pros & Cons of Limited Company
| Pros | Cons |
| ➸As an owner of a limited company, your financial risks and liabilities are limited. Your personal assets are never at risk, even if your company ends up in debt. ➸Since limited companies need to pay corporation tax, as a shareholder or a director, you can decide to draw a limited salary, and most of your earnings can be in the form of dividends. ➸The name of your limited company will be saved in the Companies House database after registration. No other business can use this name. ➸Instead of paying income tax, you can choose to pay dividend tax and reduce the National Insurance contributions. | ➸The business must meet specific legal obligations set by Companies House. ➸There’s a significant amount of paperwork and reporting involved, which can be time-consuming. You may need to hire expert accountants like Cangaf Ltd. ➸The business has to be registered with the Companies House, and details must be shared with the public. You will need to maintain transparency. ➸To register your Limited Company, you have to pay an initial filing fee. There are different tax filings, like company returns, annual accounts, and more. |
Comparing Sole Trades Versus Limited Companies
| Criteria | Sole Traders | Limited Company |
| Run your business | Yes | Yes |
| Registration formalities | Easy | Easy |
| Flexibility to work with different clients and work areas | Yes | Yes |
| Payment | Profits | Salaries and dividends |
| Corporate Tax | Not applicable | Yes |
| Safety from financial risks | Full liability | Limited liability |
| Public Transparency | Not required | Required |
A limited company offers financial security advantages. On the other hand, a sole trader is personally responsible for all profits and losses but enjoys complete autonomy over the business’s operations.
If your work involves larger volumes or higher financial risk, a limited company might be a better option. Being a sole trader is often the ideal choice for smaller workloads or simpler operations.
Which is the Best For You: Sole Trader or Limited Company
It’s important to assess your business goals and expectations before deciding between registering as a sole trader or a limited company.
Choose the sole trader route if you’re comfortable with a limited number of clients or if you operate on a direct, small-scale business model. However, if you plan to grow your business, staying a sole trader could be risky.
On the other hand, running a limited company comes with more responsibility. The documentation is extensive, and multiple tax returns must be filed. There are also several legal obligations that must be fulfilled.
If you expect your business to scale rapidly, a limited company is likely the better choice. But if you foresee your operations staying small and manageable, a sole trader setup is the ideal option.
Speak with us at Cangaf Ltd.; we’ll happily support you with your bookkeeping, tax returns, and overall business planning.
Frequently Asked Question
Is it a good idea to change from sole trader to limited company?
If your business as a sole trader is growing rapidly, it may be time to consider switching to a limited company. It's best to speak with an accountant to assess whether this move makes sense based on your finances and long-term goals.
This is where professional accountants like Cangaf Ltd. can help guide you toward well-informed decisions.
As a sole trader, can I hire employees?
Yes, you can hire employees even as a sole trader. Just make sure to report this to HMRC. There's no limit on the number of employees a sole trader can have, so there's no need to become a limited company just to expand your team.
Do I need an accountant as a sole trader?
Generally, sole traders don’t need an accountant, especially if their business operations are small and manageable. However, if the financial side starts becoming overwhelming, it’s a smart move to seek professional help.
