Sole trader or limited business: Which is right for you?

Business meeting

If you’ve thought about running your own business and decided that now is the time for your great idea to become something more concrete, you’ll soon have another important decision to make— how to register your business.

This is particularly important, as it impacts many of your business decisions, including how much tax you have to pay, and how much responsibility you’ll take for your finances. The two most popular structures first-time business owners choose between are sole trader and limited business. Here, we’ve highlighted the key advantages and disadvantages of both to help identify the best option for you.

What is a sole trader?

A sole trader is an individual who is self-employed and the sole owner of the business, retaining all profits after tax. As this is the simplest way to start a business, it’s also the most popular choice for new CEOs. Registering as a sole trader is suitable if you’re a small business owner, a freelancer with only a few clients, or those with an annual income below £20,000. This is due to the cheaper costs required to begin trading, which massively benefits you as a first-time entrepreneur.

What is a limited business?

A limited business is a structure with its own legal identity, separate from any owners or directors. The assets and liabilities owned by the company are not connected to any personal finances, which provides protection should anything happen to the company, including fraud or debt. If you then take a chance on a risky decision which happens to fail, it won’t be your responsibility to repair the financial damage of the situation. Your decision to register as a limited business will also depend on the industry in which you operate. For instance, if you work in the corporate and financial sector, where more financial protection and legal backing may be required, this option will be best for you.

Key things to consider for your business

Business registration process

If you’re operating a limited business, you must register with Companies House as either ‘limited by shares’ or ‘limited by guarantee’. Those in the latter category are often charities, community projects, and clubs and societies, using this status as protection from personal liability for any company debt. In contrast, if a company is limited by shares, their shareholders would benefit from shared liability, so if anything goes wrong, each shareholder would only have to pay their share.

In order to register officially, companies must provide paperwork to the government, showing the operation for your business accounts, as well as provide a confirmation statement and corporate tax return annually.

As a sole trader, there isn’t actually a need to register through Companies House. However, you must inform them of your self-employed status in order to submit a self-assessment tax return every year. You may even choose to operate under a business name rather than your own name.

In this case, we recommend ensuring that you reserve the company name to stop anyone from registering it as a business later down the line, however, you will need to declare the dormant nature of the business to HMRC. While you can do this yourself, it may be easier to work with a dedicated service that will complete this on your behalf, as it can get complicated. Online Filings, for example, will liaise with HMRC on your behalf, letting them know of your status as a sole trader, and reserving your company name at the same time. This lets you get on with your day-to-day business without the worry of how you’re trading.

Start-up costs

Starting a business requires some upfront capital to get up and running. The most considerable operating costs include paying for office space, equipment, and employee wages, which may pose a problem if you have limited funds. This is because banks and investors are typically more reluctant to lend to sole traders. Instead, they prefer to finance limited businesses, as they are monitored rigorously by government bodies and officials. Since company information is published online, this also allows for complete transparency to the general public, making them more trustworthy in the eyes of banks and investors.

As a sole trader, you rely on your personal credit score to borrow any capital, which means if you have a bad credit rating you’ll find it near impossible to secure a loan. There are two separate credit rating files which lenders will look at—one as a consumer and one as a company. Limited businesses, on the other hand, can establish their own credit rating. Having a low personal credit rating may affect the likelihood of approval for a bank loan, but doesn’t make it impossible to get one.

How much capital you need depends on the size of the business you’re operating. As sole traders are often running small establishments, you may not need a large amount of capital. However, a limited business operating on a larger scale will require more assets and employees and, as a result, you’ll need more funding from banks and investors.


Tax rates are generally more efficient for limited businesses as opposed to sole traders, as you will need to pay corporation tax, which currently stands at 18% of your annual profit. As a limited business owner, you also don’t need to pay income tax or national insurance. For every year you operate as a limited business, you must submit full statutory accounts and a company tax return, as well as submit monthly or quarterly payments of employees’ income tax and national insurance.

On the other hand, sole traders have to pay both income tax and national insurance, and sometimes income tax payments on account, which means covering a proportion of the tax owed in advance. These payments are split into two, accounting for the total yearly tax amount—the first payment in January and the second in July. And unless you hire an accountant, you’ll have to fill out the tax return form yourself, which can be stressful and time-consuming. So, always remember to keep full documentation of your earnings for evidence and to lessen your stress levels, such as bank statements and invoices.

Keep your business protected

Sole traders have unlimited liability, meaning that businesses and owners are considered one and the same under UK law. Therefore, if you are a sole trader and your business goes into debt, you would be personally liable and could lose your own assets in covering the costs. However, an advantage to being a sole trader means you have full ownership over the business and its assets, giving you complete control of every action and decision.

A limited business has the advantage of limited liability, ensuring your personal assets aren’t at risk. Being incorporated as a limited business forms a legal distinction between the business and the owner, so if you want your business to be officially protected to a much higher standard, this may be a more suitable option.