Research and reports
What’s the difference between a sole trader and a limited company? Check out our definitions, compare the advantages and disadvantages, and find out which legal structure best suits your business.
Every business, no matter how big or small, needs a legal structure. You can choose to be either a sole trader, partnership, or limited company – and most choose to be either a sole trader or a limited company.
Whether you choose to set up as a limited company or sole trader, this is officially the legal structure of your business.The main differences between the two involve tax rates (as well as how you pay tax) and how much liability you have over your business – including debts and assets.
Sole traders are generally self-employed business owners, whereas a limited company could have any number of employees. While setting up as a sole trader is easier than starting a limited company, it may not be the right fit for your business.
According to the Department for Business, Innovation and Skills, in 2022 there were 3.1 million sole proprietorships (56 per cent of the total), 2.1 million actively trading companies (37 per cent), and 353,000 ordinary partnerships (six per cent). Keep reading to learn which is the right fit for your business.
A sole trader is essentially a self-employed person who’s the sole owner of their business. It’s the simplest business structure out there – which is probably why it’s the most popular – and you can set up as one via the gov.uk website (you’ll need to do this for tax purposes).
Read our guide on how to register as self-employed with HMRC.
A limited company is a type of business structure that has its own legal identity, separate from its owners (shareholders) and its managers (directors). This remains the case even if it’s run by just one person, acting as shareholder and director.
Ultimately, you need to weigh up the difference between a sole trader and limited company, as the structure you choose could impact on everything from profits to paperwork. Don’t rush into any decision and speak to an accountant if you’re unsure, as their expertise is often invaluable when it comes to tax.
Elsewhere, investigate insurance – regardless of the structure you choose – as running any type of business will bring its own unique risks. Discover more on sole trader insurance and limited company insurance and find out a basic overview of what you'll need.
As things stand this offers a kinder tax rate than the higher rates of income tax, meaning forming a limited company can be more profitable. In addition to this, there’s a wider range of allowances and tax-deductible costs that a limited company can claim against its profits
You’ll need to pay a fee to incorporate too – check out our guide to setting up a limited company to learn more.
If your business circumstances change and you decide that being a limited company is a better fit for you, you can transition from being a sole trader to a limited company.
While it’s always good to speak with an accountant or someone who knows your business well, here’s a rough outline of the steps you need to take.
Rosanna Parrish is a Copywriter at Simply Business, specialising in legal and HR content. Trained at London College of Communication, she has been creating content professionally for eight years at publications across the UK and Spain. Starting her career in health insurance, she also worked in education marketing before returning to the insurance world. Rosanna also writes about wellbeing in the workplace. She lives by the sea and does her best writing in coffee shops.
We create this content for general information purposes and it should not be taken as advice. Always take professional advice. Read our full disclaimer
6th Floor99 Gresham StreetLondonEC2V 7NG
Sol House29 St Katherine's StreetNorthamptonNN1 2QZ
© Copyright 2023 Simply Business. All Rights Reserved. Simply Business is a trading name of Xbridge Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Registration No: 313348). Xbridge Limited (No: 3967717) has its registered office at 6th Floor, 99 Gresham Street, London, EC2V 7NG.