Should I be a sole trader or set up a limited company?

Last updated 3 October 2026 · General guidance, not legal or tax advice

A sole trader and their business are legally the same person, so you keep the profits but are personally responsible for the business's debts. A limited company is a separate legal entity: it owns its money, signs its own contracts and is usually responsible for its own debts, but it comes with more paperwork and public filings.

Neither is automatically better. The right choice depends on your expected profits, how you want to take money out, the risk in your work, what clients expect and how much admin you are willing to take on. Many people start as sole traders and incorporate later; others need a company from day one because clients or contracts require it.

What is the legal difference?

As a sole trader you are self-employed. There is no separate business in law — you register with HMRC for Self Assessment, and the business's income, assets and debts are yours personally.

A private limited company is incorporated at Companies House. It has its own legal identity, separate from the people who own it (shareholders) and run it (directors). Shareholders' liability is generally limited to what they paid, or agreed to pay, for their shares. That protection is not absolute: directors can become personally liable in some situations, such as giving personal guarantees, wrongful trading or breaching their duties.

How do the two compare in practice?

	Sole trader	Limited company
Setting up	Register for Self Assessment with HMRC	Register the company at Companies House, then set up Corporation Tax
Legal status	You and the business are the same	Separate legal entity
Debts	You are personally liable	Usually the company's, with exceptions
Public information	Little is published	Company details, officers, PSCs and accounts appear on the public register
Annual admin	Self Assessment return	Annual accounts, Company Tax Return, confirmation statement, plus directors' own tax returns where needed
Taking money out	Profits are yours	Salary, dividends or expenses, each with its own rules

Is a limited company better for tax?

Sometimes, but not always. Sole traders pay Income Tax and National Insurance on their profits. A company pays Corporation Tax on its profits, and then you pay personal tax on whatever you take out as salary or dividends. Whether that works out cheaper depends on your profit level, other income, how much you need to draw and current rates — which change.

Running a company also has costs: accountancy fees are usually higher, and you may need payroll. For lower profits the saving, if any, can be small or disappear. Before deciding on tax grounds, it is worth asking an accountant to compare both routes using your own figures — In Front Accounting can do this.

What about credibility and contracts?

Some larger clients, agencies and public bodies prefer or require suppliers to trade through a limited company. A company name and number can also make a small business look more established. That is a commercial consideration rather than a legal one, so check what your own clients expect.

What about privacy?

A company's registered office address and its directors' service addresses appear on the public Companies House register. If you use your home address for either, it becomes publicly visible. You can avoid that by using a registered office address service and a director service address instead. Companies House still holds directors' home addresses privately.

Sole traders do not appear on the Companies House register, but anyone dealing with you will normally see the address you trade from.

When does a limited company usually make sense?

Your profits are high enough that the company structure may be more tax-efficient — confirm with an accountant.
Your work carries financial risk and you want the company, not you, to bear ordinary business debts.
Clients or contracts require you to trade through a company.
You plan to bring in co-owners or investors, which shares make easier.
You are comfortable with extra filings and keeping company money separate from your own.

When might staying a sole trader be simpler?

You are testing an idea or expect modest profits at first.
You want the lowest admin and simplest accounts.
You need to draw most of the income for personal living costs.
Nobody you work with requires a company.

Changing later is possible. If you incorporate an existing sole trader business, there can be tax points to consider on transferring assets, so take advice before you switch.

In short

A sole trader and their business are legally the same, so the owner keeps the profits but is personally liable for business debts. A limited company is a separate legal entity registered at Companies House, which usually limits the owners' liability but adds public filings: annual accounts, a Company Tax Return and a confirmation statement. A company can be more tax-efficient at higher profit levels, but that depends on your circumstances and current rates, and accountancy costs are usually higher. A company may also suit you if clients require one or you plan to bring in co-owners. Many businesses start as sole traders and incorporate later. Compare both options with your own figures before deciding.

Frequently asked questions

Can I switch from sole trader to limited company later?

Yes. You can register a company at any time and move the business into it. There can be tax considerations when transferring assets or goodwill, so it is sensible to take advice first.

Will my home address be public if I set up a company?

Only if you use it as the registered office or as a director's service address. You can use a separate address for both; Companies House keeps directors' home addresses private.

Sources and official guidance

This guide is general information about UK rules as at 3 October 2026. It is not legal, tax or financial advice.