A sole trader and their business are the same person in law, so you are personally liable for its debts. A limited company is a separate legal entity, and owners are responsible for its debts only up to their financial investment. The limited company route brings more rules, filings and tax choices.
At a glance
- Sole trader liability
- Unlimited: personally responsible for all business debts
- Limited company liability
- Owners responsible only up to the value of their financial investment
- Company registration (online)
- £100 at Companies House
- Corporation Tax main rate
- 25%, with a 19% small profits rate up to £50,000 of profit
- Sole trader tax
- Income Tax and National Insurance through Self Assessment, no Corporation Tax
- Moving between structures
- Usually easier from sole trader to limited company
What is the main difference between a sole trader and a limited company?
The main difference is legal: a sole trader is the business, while a limited company is legally separate from the people who own it. GOV.UK says most businesses register as one or the other, and that the structure can affect how you pay tax and your legal responsibilities.
| Sole trader | Limited company | |
|---|---|---|
| Liability | Unlimited: you are personally responsible for all the debts of the business | Owners are responsible for the debts only up to the value of their financial investment |
| Profits | You keep all the profits after paying tax | Directors follow rules when taking money out, such as salary, dividends or a directors’ loan |
| Registering | You can start trading straight away; register for Self Assessment if you earn more than £1,000 in a tax year | You register the company before you start trading |
| Name | Your own name or a trading name | Registered name with rules to follow, usually ending in Limited or Ltd |
| Accounts | Keep records for your Self Assessment return | File accounts and a Company Tax Return, and a confirmation statement |
| Corporation Tax | Not paid by sole traders | The company pays it on its profits |
| Employment status | Self-employed | Directors may be employees or office holders |
Which structure protects your personal assets?
A limited company is the structure with liability protection, because owners are responsible for business debts only up to the value of their financial investment. A sole trader has unlimited liability and has less protection if something goes wrong, which business insurance may partly offset.
A director can still be personally responsible for company debts they have guaranteed. Lenders sometimes ask for one, as our guide to personal guarantees explains. Directors can also be fined, prosecuted or disqualified if they do not meet their legal duties.
Read personal guarantees for business loans before you assume the company structure shields everything you own.
How does tax differ?
A sole trader pays Income Tax and National Insurance on all profit through Self Assessment, while a limited company pays Corporation Tax on its profits and its owners are taxed on what they take out. Which route costs less depends on your profit and how you pay yourself, so it is a question for an accountant.
| Item | Sole trader | Limited company |
|---|---|---|
| Tax on profit | Income Tax on profits through Self Assessment | Corporation Tax: 25% main rate, 19% small profits rate for profit of £50,000 or less, with Marginal Relief between £50,000 and £250,000 |
| National Insurance | Class 4 for 2026 to 2027: 6% on profits from £12,570 to £50,270, then 2% | Depends on how directors are paid, for example through salary |
| Dividends | Not applicable | Shareholders may pay Income Tax on dividends over £500; the company does not pay tax on dividend payments |
| VAT | Register if you meet the requirements | Register if the company meets the requirements |
The company thresholds are reduced for short accounting periods and where there are associated companies. See how to pay Corporation Tax, dividend tax and the VAT registration threshold for the detail.
How do you take money out of each?
A sole trader simply draws from profits, while a company director must use a recognised route: a salary, dividends or a directors’ loan. GOV.UK says that to pay a salary the company must register as an employer and operate PAYE.
- Salary: subject to Income Tax and National Insurance, taken off by the company.
- Dividends: paid only from available profits from current and previous years, with a directors’ meeting to declare each one and a dividend voucher for each payment.
- Directors’ loan: if you take more out than you have put in and it is not salary or dividend, records must be kept and detailed tax rules apply.
Company and personal money must stay separate. GOV.UK says the company’s banking must be separate from your personal banking. Our guides to paying yourself from a limited company and the director’s loan account go further.
How much more admin does a limited company involve?
A limited company involves more admin, because the directors must keep company records, file accounts and a Company Tax Return, and file a confirmation statement. GOV.UK says directors can hire an accountant but remain legally responsible for the company’s records, accounts and performance.
| Obligation | Sole trader | Limited company |
|---|---|---|
| Annual return to HMRC | Self Assessment tax return | Company Tax Return, plus Corporation Tax payment |
| Filing with Companies House | None | Annual accounts and a confirmation statement |
| Public information | None on the register | Registered office address and some director details are on the public register |
Read our guides to the confirmation statement and how to file company accounts to see what the work involves.
What does it cost to start each one?
Registering as a sole trader is free, while registering a limited company online costs £100 at Companies House, or £124 by post. There may also be accountancy fees on either route, but those depend on the adviser and are not set by government.
A company is usually registered within 24 hours online, and postal applications take 8 to 10 days. Our guide on how to set up a limited company covers the steps. For the sole trader side, see what is a sole trader.
Does the structure change how you can borrow?
Yes, the structure changes who is assessed and how the lending is regulated. A lender looks at a sole trader’s personal finances because there is no separate company, whereas a limited company has its own accounts and credit history, although directors may still be asked for personal guarantees.
The FCA says its consumer credit perimeter covers business lending of £25,000 or less to sole traders and small partnerships, but not to limited companies. A £20,000 loan to a sole trader may fall inside the perimeter, whereas the same loan to a limited company would not. Business lending above £25,000 would generally fall outside it.
Neither structure makes finance more likely, and every offer is subject to status and lender criteria. See loans for sole traders and the lender directory.
Can you switch from sole trader to limited company later?
Yes, you can move from one business structure to another, and GOV.UK says it is usually easier to move from being a sole trader to a limited company. Ask your accountant about the tax and practical points of transferring contracts, assets and accounts.
GOV.UK says you must tell HMRC when you stop trading as a sole trader and send a final tax return.
Which suits your business?
There is no single right answer, so weigh up the points that matter to you. Questions worth asking:
- How much risk does the business carry, and could a debt reach your own assets?
- How much profit will you make, and do you need to leave money in the business?
- Are you comfortable with filing, record keeping and public information?
- Will you need finance, and who will a lender assess?
Take the answers to an accountant, who can model the tax for your circumstances. Capzy does not give tax, legal or accounting advice.
Where does Capzy fit in?
Capzy is a credit broker, not a lender, and is paid by the lender. Choosing a structure is not something we arrange, but once you are trading as either, we can introduce you to lenders for business finance.
You can check your funding options with a soft search that does not affect your credit score. A full application to a lender may involve a hard search, and any offer is subject to status and lender criteria.
Sources
- Set up a business, GOV.UK
- Become a sole trader: What a sole trader is, GOV.UK
- Set up a private limited company, GOV.UK
- Register your company, GOV.UK
- Running a limited company: your responsibilities, GOV.UK
- Taking money out of a limited company, GOV.UK
- Company and accounting records, GOV.UK
- Corporation Tax rates, expenses and reliefs, GOV.UK
- Self-employed National Insurance rates, GOV.UK
- Stop being self-employed, GOV.UK
- Feedback Statement FS26/2, Financial Conduct Authority
Capzy is a credit broker, not a lender. We get paid by the lender. This page is general information, not financial, tax or legal advice. Finance is subject to status, lender criteria and affordability; rates and terms depend on your circumstances.