October 21, 2025
Starting a business in the UK? An important early decision to consider is your company’s legal structure. There are two main choices: operate as a sole trader, or set up a limited company. Your choice of legal structure impacts how you pay tax, what you are personally liable for, and how your company is publicly perceived. In this post, we’ll break down a few of the key differences so that you can decide what is best for your company.
A sole trader is the default form of every startup. It involves being self-employed and owning your business. As a sole trader, there is no legal distinction between you and your business. This means that all profits are yours after taxes, but you’re also personally liable for all business debts.
Becoming a sole trader is simple - you just need to inform HMRC and then register for self-assessment.
This structure suits freelancers, small one-man startups and entrepreneurs testing out business ideas who may not want to commit to a more formal framework just yet.
A limited company involves turning your business into a separate legal entity. You will need a separate business bank account - your business can then own assets and take on debts that you are not personally required to pay. This means that if your business gets into arrears and debt collectors come to seize goods, they can only seize assets owned by your business, not personal assets. The downside is that you are limited as to which business profits you can claim for yourself.
To set up your business as a limited company, you need to register with Companies House and appoint a director (this can be yourself). You must then comply with ongoing reporting requirements and issue shares.
For growing businesses, this is a recommended legal structure as it can provide personal asset protection and tax benefits.
To sum up the differences, here are 4 core distinctions between a sole trader and a limited company:
Liability
Taxation
Setup and admin
Public perception
Selecting a legal structure depends on your company size and goals. For very small businesses and side hustles, operating as a sole trader is recommended. For businesses that are growing - particularly those employing staff and taking on larger debts - a limited company is a wiser decision. Consider your projected turnover and make the switch once profits hit £30,000 to £50,000.
The biggest risk is unlimited liability. Because there is no legal distinction between you and your business, your personal assets, such as your home or savings, could be used to pay off business debts if things go wrong.
As a sole trader, you pay Income Tax on all your business profits via a Self Assessment tax return. A limited company pays Corporation Tax on its profits. You would then typically pay yourself a salary and/or dividends, which are subject to personal income taxes.
Setting up a limited company is more involved than becoming a sole trader but is still a manageable process. You need to register with Companies House, appoint a director, and issue shares. While there is a small registration fee and ongoing admin like annual reports, it establishes a more formal and protected business structure.
You should consider switching when your business starts to grow, take on employees, or incur significant debts. A common benchmark for making the change is when your annual profits consistently reach the £30,000 to £50,000 range, as the tax benefits and liability protection become more advantageous.
Yes, it can. Limited companies often project a more professional and established image. This can make it easier to attract high-value clients, secure business loans, or find investors compared to operating as a sole trader.
