In the sole trader vs limited company choice, a sole trader is personally responsible for all business debts and is taxed on the business’s profits through Self Assessment. A limited company is a separate legal person with limited liability, but brings more rules, filings and running costs. Switching can suit growing businesses ready for the extra admin.
Key takeaways
- A sole trader has unlimited liability; a limited company’s owners are generally liable only up to their investment.
- Company money isn’t your money: it comes out as salary, dividends or a recorded director’s loan.
- Directors must keep records, file annual accounts, a Company Tax Return and a confirmation statement.
- Compare on your own figures with current rates, and allow for higher running costs.
Sole trader vs limited company: what’s the difference?
A sole trader and their business are legally the same thing. You make the decisions, keep the profits after tax and report everything on your own Self Assessment tax return (GOV.UK).
A limited company is a separate legal person, owned by its shareholders and run by its directors. In a small business you’re often both, but the company’s money is not your money, and that changes how you’re taxed and how you take money out.
When does switching to a limited company make sense?
Have your profits grown?
As a sole trader, you may pay Income Tax and National Insurance on your business profit, depending on how much it is, whether you take it out or leave it in the business. A company pays Corporation Tax on its profits, and you then pay personal tax on what you take out as salary or dividends.
Because the two systems work differently, the tax position can change as profits rise. Where the balance tips depends on your profit, how much you need to live on and the tax rates at the time. Rates can and do change, so any comparison should be run on your own figures with up-to-date rates rather than a rule of thumb.
Do you want to limit your personal risk?
As a sole trader you have unlimited liability: you’re personally responsible for all the debts of the business. With a company, owners are generally responsible only up to the value of their investment, known as limited liability (GOV.UK).
That protection has limits. GOV.UK notes you may still need business insurance, and directors who don’t meet their legal duties can face fines, prosecution or disqualification.
In practice, banks and landlords may still ask directors for a personal guarantee.
Do your customers expect a limited company?
Some larger customers, contractors or suppliers prefer to work with limited companies, and a company name and registered number can give a more established image. It’s worth asking your key customers rather than assuming.
Do you want more flexibility over taking money out?
A company gives you more than one way to extract money (GOV.UK):
- Salary, paid through payroll, with Income Tax and National Insurance deducted. The company must register as an employer.
- Dividends, paid to shareholders out of profits. A company can’t pay out more than its available profits, and each dividend must be declared at a directors’ meeting, minuted and recorded on a dividend voucher.
- Directors’ loans, where you take money that isn’t salary, a dividend, an expense repayment or money you’ve previously paid into or lent the company. These must be recorded in a director’s loan account and can have tax consequences.
You can’t simply dip into the company bank account as you might with a sole trader account.
What are the duties and costs of running a limited company?
As a director you must (GOV.UK):
- follow the company’s rules in its articles of association
- keep company and accounting records
- prepare annual accounts and a Company Tax Return
- file accounts and the tax return, and pay Corporation Tax
- report certain changes to Companies House
You can hire an accountant to help, but you stay legally responsible. The main ongoing duties are:
Annual accounts and tax returns. A private limited company must prepare statutory annual accounts and a Company Tax Return each year (GOV.UK). Accounts are filed with Companies House within 9 months of the financial year end (a company’s first accounts are due 21 months after it registered). Corporation Tax is usually payable 9 months and 1 day after the accounting period ends, and the Company Tax Return is due 12 months after it ends.
Confirmation statement. At least once every 12 months, you must confirm the information Companies House holds in a confirmation statement.
Payroll. If you pay yourself a salary, you’ll need to run payroll and report to HMRC.
Identity verification. Directors and people with significant control must verify their identity with Companies House.
Less privacy. Directors’ names and some personal details are publicly available from Companies House, as is the registered office address. You also need to keep company finances separate, usually with a business bank account.
Higher running costs. There’s more to prepare and file, so accountancy costs are usually higher than for a sole trader.
When might staying a sole trader suit you better?
Being a sole trader remains the simplest structure. You can start trading straight away and must register for Self Assessment if you earn more than £1,000 in a tax year from self-employment. There are fewer filings, more privacy and you can take money out when you need it.
If profits are modest, your work carries little financial risk and your customers don’t mind, the extra cost and admin of a company may outweigh the benefits.
How do you switch from sole trader to limited company?
You’ll need to tell HMRC you’ve stopped being self-employed and send a final Self Assessment return for the sole trade. Contracts, bank accounts, insurance and any VAT registration need reviewing, and moving business assets into a company can have tax consequences. Plan the timing and steps in advance.
Getting help
If you’re unsure whether your business has outgrown being a sole trader, it helps to look at your own figures and plans first. Our accounts page covers year-end accounts for sole traders and limited companies, our company secretarial page explains help with Companies House filings, and our Payroll & CIS page covers running a payroll.
If you’re weighing up sole trader vs limited company for a business in Wisbech or the wider Fenland area, you can call our office landline on 01945 581102, 8am to 4pm, Monday to Friday.
Frequently asked questions
Company owners are generally responsible for business debts only up to the value of their investment, while sole traders have unlimited liability. You may still need business insurance, and directors who don’t meet their duties can be fined, prosecuted or disqualified. In practice, banks and landlords may still ask directors for a personal guarantee.
Not freely. Money usually comes out as salary through payroll, dividends from available profits, or a director’s loan, which must be recorded and can have tax consequences.
No, but directors must keep records and prepare and file annual accounts and a Company Tax Return. You can hire an accountant to help, but you remain legally responsible.
At least once every 12 months, confirming the information Companies House holds about the company.
Tell HMRC you’ve stopped self-employment and send a final Self Assessment tax return.
Written by the team at Barwell Accountants, ACCA chartered certified accountants.
This article is general information only, correct at the time of writing (18 October 2026). It isn’t financial, tax or legal advice and shouldn’t be relied on. Rules change and everyone’s circumstances differ, so take professional advice before acting. We accept no responsibility for any action taken based on this article.
Sources
- Set up a business
- Limited companies
- Taking money out of a limited company
- Director’s loans
- Directors’ responsibilities
- Prepare and file annual accounts for a limited company
- Company Tax Returns
- Confirmation statement
- Verifying your identity for Companies House
- Register for Self Assessment
- Stop being self-employed