Sole Trader Versus Limited Company: What’s Right for You?

“It’s not the plan that is important, it’s the planning.” — Dr. Graeme Edwards

When I first started out in business, I spent more time worrying about whether to register as a sole trader or a limited company than actually getting work. I remember sitting at my kitchen table, Googling things like “tax advantages of a limited company" and “can sole traders hire people?” while my dog barked at the postman. Sound familiar?

If you're stuck between the two, you're not alone. At the start of 2023, 56% of all UK businesses were sole traders. That's 3.1 million people who just cracked on with it, often without needing a limited company structure. But there’s a reason the other 2.1 million opted to incorporate.

So, which one is right for you? Let’s break it down — plain and simple.

What's the Real Difference?

Being a sole trader means you are the business. You and your work are one and the same. No separation. If your business gets into debt, so do you. If it succeeds, the profits are all yours (after tax, of course!).

A limited company, on the other hand, is its own legal thing. It’s like creating a business 'persona' — a separate identity from you. If the business gets into trouble, your personal stuff (like your car, house, or that lovely new sofa) is usually protected.

When I went limited with my second business, I slept better at night knowing that if things went south, I wouldn't lose my home. That peace of mind? Worth it.

Tax: Where It Really Matters

Sole traders pay income tax on their profits — anywhere from 20% to 45%, depending on how much they earn. There’s also National Insurance to factor in. It's simple enough, especially when you're just starting out or earning less than £30k.

Limited companies pay corporation tax, which is currently 19% for profits of less than £50,000 (gradually increasing to 25% if you are lucky enough to reach £250,000). Then, as a director, you can pay yourself through a mix of salary and dividends. Dividends are taxed at a lower rate and don’t come with National Insurance. This combo can save you money if your profits are solid.

Quick example:

I had a client, who was earning around £50k a year as a consultant. As a sole trader, her tax bill was biting hard. We switched her to a limited company, and by taking a small salary and the rest as dividends, she saved nearly £4,000 per year. Not bad for one decision.

Liability: What’s At Risk?

Here’s the scary bit.

Sole traders have unlimited liability. If your business racks up debt, you’re personally responsible. I once knew a guy who ran a small events business. COVID hit, bookings dried up, and he still owed money for equipment. As a sole trader, those debts followed him personally. It wasn’t pretty.

A limited company protects you with limited liability. Worst-case scenario? You only lose the money you put into the business (and maybe a bit of pride). Your personal assets stay safe — assuming you didn’t sign any personal guarantees.

Paperwork & Admin

This is where some people sigh. And fair enough!

Sole traders have it easy. Just register with HMRC, file a Self Assessment tax return once a year, and keep some basic records. That’s it.

Limited companies? A bit more admin. You’ll need to register with Companies House, submit annual accounts, file Corporation Tax returns, and keep proper records. There’s also the Confirmation Statement — and if you have employees, PAYE payroll too.

It sounds like a lot, and it can be. But with an accountant (or good software), it’s manageable. And let’s be honest — if your business is growing, this kind of structure can help you take things to the next level.

Switching Between the Two

You don’t have to stick with one forever.

Many people start as sole traders and switch to limited when the timing feels right — often when profits grow, or when they want to bring in investors or build a more serious brand.

You can also go the other way, but it’s less common. Closing a limited company has more steps and might trigger tax consequences. So if you’re thinking about switching either way, it’s worth speaking to an accountant first.

The Client Perception Thing

This one’s a bit subtle, but it matters.

Some clients — especially larger companies — prefer working with limited companies. It feels more official. More stable. You get your own registration number, and your name on Companies House. It shows commitment.

I’ve had contracts land on my desk with clauses like: "Contractor must operate as a limited company." It's not snobbery — it's risk management for them.

If you’re targeting corporates or agencies, it might be a good reason to incorporate earlier.

So, Which Is Better?

It depends. (Sorry.)

Go sole trader if you:

- Want to start quickly and simply

- Expect modest profits (under £30k)

- Don’t want lots of admin

- Value privacy (your details stay off the public record)

Go limited company if you:

- Are earning over £30k and want to be tax efficient

- Need to protect personal assets

- Want to build credibility with bigger clients

- Plan to scale or bring on partners

There’s no one-size-fits-all answer. I’ve seen freelancers flourish as sole traders for years. I’ve also watched tiny side hustles go limited from day one and grow into six-figure businesses in under 12 months.

Final Thoughts

If you're still unsure, that’s totally normal. Choosing your business structure is a big decision — but it’s not irreversible. The key is to think about where you are now, and where you want to go.

Ask yourself:

- How much do I expect to earn this year?

- Am I putting my personal assets at risk?

- Will clients care about how I’m set up?

- Do I want to grow this business or keep it small?

And then... decide.

Still stuck? Chat to an accountant. Zeus Accountants offer free initial advice — no pressure, no jargon. Just straight answers.

Whatever route you take, keep going. Starting your own business is no small feat — structure or no structure.

You’ve got this.

Want help deciding the right setup for your business? Drop us a message. Sometimes, all it takes is one honest conversation.

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