Limited company or sole trader – compare business structures

One of the most important decisions you make when you set up a new business is to decide what type of trading structure to use.

There are several less widely used legal structures, such as limited liability partnerships, which are often used by accountancy and other professional firms.

However, the vast majority of small business owners work as self-employed (i.e. as ‘sole traders’ or ‘partnerships’), or via their own limited companies.

Please take some time to read the following points to help evaluate which trading structure is best for you.

Scroll down for our handy limited vs self-employed comparison table!

Tax issues

Limited companies, their directors, and the self-employed are each taxed differently.

Limited company taxes

A limited company is a separate legal entity from its shareholders and directors, whereas the business and personal affairs of a sole trader are treated as one for tax purposes.

• Limited companies pay Corporation Tax on their annual profits.
• Directors and employees pay personal tax on income they receive from the company.
• Shareholders pay dividend tax on dividends received from the company, where applicable.
• Employees, including directors receiving employment income, pay income tax and NICs on salary above the relevant thresholds.
• The company itself pays Class 1 Employers’ NICs on salaries above the relevant threshold, subject to any available reliefs such as the Employment Allowance.

Sole trader taxes

If you are a sole trader, you pay income tax on your annual taxable profits. You also pay Class 4 National Insurance if your profits are above £12,570.

For 2026/27, Class 4 NICs are charged at 6% on profits between £12,570 and £50,270 and 2% on profits above £50,270.

There is no compulsory Class 2 NIC charge. If your profits are at least the Small Profits Threshold of £7,105 in 2026/27, Class 2 contributions are treated as having been paid, which helps protect your National Insurance record without you actually paying Class 2.

If your profits are below £7,105, you do not have to pay Class 2, but you may be able to make voluntary contributions at £3.65 per week in 2026/27 to protect your entitlement to the State Pension and certain benefits.

Your total tax bill is calculated when you file your annual tax return. The normal online Self Assessment deadline for submitting your return and paying any tax due is 31 January following the end of the tax year.

Value Added Tax (VAT) – companies and the self-employed

Both companies and sole traders must register for Value Added Tax (VAT) if their taxable turnover exceeds the registration threshold. The VAT registration threshold is currently £90,000.

You can register for VAT voluntarily before your taxable turnover reaches the VAT registration threshold if you wish to.

There can be benefits to doing so. For example, a VAT-registered business can usually reclaim VAT on eligible business purchases, subject to the normal VAT rules.

Administration and costs

Generally speaking, running a limited company is more onerous than being self-employed.

As a company director, you also have a number of statutory and financial duties to keep on top of.

Limited company administration

All limited companies are registered with Companies House.

Companies file a Confirmation Statement and annual accounts, as well as keeping Companies House informed of certain changes to the company and its officers.

You can form a limited company online for £100, so the cost of setting up the business structure itself is relatively modest.

In reality, the ‘hassle’ involved in being a company director is not significant for many small business owners.

Most companies use an accountant to handle their tax affairs and help deal with Companies House and HMRC.

Sole trader administration

If you’re self-employed, you have less paperwork to worry about, although you must still keep accurate records.

When you start your new business, you normally need to tell HMRC that you are self-employed by 5 October following the end of the tax year in which you started trading if you need to complete a Self Assessment return.

You also need to comply with any regulations that apply to your industry or business.

Sole traders may hire a bookkeeper or accountant to complete or help with their annual tax returns.

Business structures and credibility

You may find it more advantageous to trade via a limited company in some industries or professions.

Some business owners find their customers more comfortable dealing with a limited company.

If you provide professional services, such as consultancy, some clients may prefer or require suppliers to operate through a limited company.

Employment status

Although most businesses can be run under either type of trading structure, each has a very different legal status.

Limited company

A limited company is a legal entity with a separate legal status from its directors and shareholders.

If you are a director, you are an officer of the company. A director can also be an employee of the company, but being a director does not automatically make you an employee.

Even though you are working for your own company, you are not treated as self-employed simply because you are a director.

Sole tradership

As the name suggests, as a sole trader, you cannot also be an ’employee’ of your own business. You are the business.

This means that both you, the individual, and your business share the same legal and tax status.

Business structures and liability

Following on from employment status, your liability also differs between structures if things go wrong.

Limited company liability

A limited company is a separate legal entity. Its debts and liabilities therefore normally belong to the company rather than its shareholders or directors personally.

For a company limited by shares, a shareholder’s liability is normally limited to any amount unpaid on their shares.

There are important exceptions. A director or shareholder may become personally liable in circumstances such as giving a personal guarantee, fraud, certain breaches of directors’ duties or other wrongdoing.

Read more about what limited liability means.

This is a key advantage that running a business as a limited company has over being a sole trader.

Sole trader liability

As a sole trader, you are personally liable if things go wrong. This might happen if your business gets into debt or faces a legal claim from a client or employee.

If your business cannot pay its debts, creditors can potentially pursue your personal assets.

Visit our sister site, ByteStart, for a wide range of sole trader content, including 15 steps to becoming a sole trader.

Limited vs. sole trader – comparison table

Aspect	Limited Company	Sole Trader / Self-Employed
Legal Status	A limited company is a separate legal entity from its shareholders and directors.	The business and its owner are the same legal entity.
Taxation	The company pays Corporation Tax on its profits. Directors and employees may pay income tax and NICs on salary, while shareholders may pay dividend tax on dividends.	The owner pays income tax on taxable business profits and Class 4 NICs where profits exceed the relevant threshold. Class 2 is treated as paid where profits reach the Small Profits Threshold, with voluntary Class 2 available in some circumstances below it.
Starting Up	You have to incorporate your company and register for the relevant taxes. You will often hire an accountant to help with the start-up tasks.	Very simple – you can start trading immediately, although you must register with HMRC for Self Assessment where required.
Liability	The company is a separate legal entity. Shareholders’ liability is normally limited to any amount unpaid on their shares, although directors or shareholders can incur personal liability in some circumstances, including where they give personal guarantees.	You are personally responsible for the debts and liabilities of the business.
Tax Planning	Shareholder-directors can have more flexibility over when dividends are paid, provided the company has sufficient distributable profits and the dividends are lawful.	Business profits are generally taxed in the tax year in which they arise, subject to the applicable accounting and tax rules.
Paperwork	More paperwork than the sole trader route. An accountant can undertake many administrative tasks, although the directors remain legally responsible for ensuring the company’s obligations are met.	Less statutory administration, although you must maintain accurate business and tax records.
Privacy	Details about the company and its directors are available on the Companies House register, although directors can use a service address to avoid publishing their usual residential address.	There is no equivalent Companies House public register of sole traders, although business details may be public for other reasons.
Raising Money	A company can raise finance through borrowing and, subject to the relevant rules, by issuing shares to investors.	A sole trader can borrow money but cannot issue shares in the business.
Tax Efficiency	Companies and their owners are taxed differently from sole traders. Dividends are not subject to NICs, but Corporation Tax, dividend tax and other company taxes mean that incorporation is not automatically the most tax-efficient option.	Income tax and Class 4 NICs may be payable on business profits. Which structure produces the lower overall tax bill depends on profit levels and individual circumstances.
Pensions	A company can make employer pension contributions for directors and employees. These can generally be deductible for Corporation Tax where the relevant conditions are met.	A sole trader can make personal pension contributions and receive tax relief subject to the normal pension rules.
Investors	An incorporated company can issue shares in the business to investors, subject to company law and its Articles.	You cannot issue shares in a sole trader business. Bringing another person into ownership would require a different business structure.
Succession Planning	The company continues to exist as a separate legal entity if a shareholder or director dies, although arrangements may be needed for the transfer of shares and management of the company.	A sole trader business has no separate legal existence from its owner, although its assets or activities may be transferred or continued by someone else.
Image	Having a limited company may provide its owners with a more professional image.	Many successful small businesses operate as sole traders, although incorporation may be preferred in some industries.
Providing personal services	Some contractors and consultants operate through limited companies because their clients or agencies prefer to contract business-to-business. IR35 and the off-payroll rules may also be relevant.	Many consultants and other professionals can operate as sole traders, although some clients and agencies will not engage individuals on this basis because of employment status and other commercial risks.
Business name	Your registered company name is protected against registration of certain names that are the same as, or too similar to, existing company names. This is not the same as trademark protection.	A trading name is not protected merely because you use it. Trademark protection is separate from business structure.
Accounts	You must prepare company accounts and file the required accounts with Companies House. Company tax reporting is made separately to HMRC.	You are not required to file company accounts at Companies House, but you must keep adequate accounting and tax records and report taxable profits to HMRC.

For these reasons, we always recommend that you discuss your business with an accountant before deciding on the right legal structure. You should not rely solely on the information we have provided in this article.