If you’re starting a small business, one of your first choices is whether to operate as a sole trader vs limited company.
The difference between a sole trader and a limited company mainly comes down to tax, liability, and admin.
Creative Takeaways
| Aspect | Sole Trader | Limited Company (Ltd.) |
|---|---|---|
| Setup | Easy and free: just register as a sole trader with HMRC | More complex: need to register your company with Companies House |
| Tax | Sole traders pay income tax and National Insurance via a self assessment tax return | Limited companies pay corporation tax on profits, and directors/shareholders can take a small salary and dividends |
| Liability | Personal assets are at risk if the business owes debt | Liability is limited: the company is a separate legal entity |
| Admin | Simple: keep records and file a tax return | More admin: annual accounts, company tax return, and statutory filings |
| Costs | Low running costs: may only need a simple accountant | Higher costs: professional accountant usually required |
| Perception | Seen as self-employed, flexible and small-scale | Seen as more professional and credible, often preferred by larger clients |
| Best For | Sole traders may prefer this if starting out or testing an idea | Limited companies also suit those earning more or looking for tax savings |
Table of contents
- 1. What is a sole trader?
- 2. What is a limited company (Ltd.)?
- 3. Difference between a sole trader and a limited company (Ltd.)
- 4. Tax differences that actually matter between a sole trader or a limited company
- 5. Costs and admin you need to know
- 6. How clients see you when you run your business
- 7. Changing from sole trader to a limited company
- 8. Find out which company structure is good for you with WallsMan Creative
1. What is a sole trader?
A sole trader is the simplest way to run your business.
You’re classed as self-employed, and there’s no legal separation between you and your business. That means you keep all the profits, but you’re also personally responsible for any debts.
How to register as a sole trader
To become a sole trader, you need to register with HMRC.
You’ll then file a self assessment tax return each year, paying income tax and National Insurance contributions on your profits. Unlike limited companies, you don’t need to register your business with Companies House.
Advantages of a sole trader
- Quick and free to set up: just register online with HMRC
- Complete control over decisions and profits
- Fewer reporting requirements compared to a limited company
- Privacy: your business details don’t appear on the public record
Disadvantages of a sole trader
- You may pay more income tax once your profits rise
- Sole traders cannot access the same tax reliefs available to limited companies
- Unlimited liability: your personal assets (like your home or car) could be at risk if the business owes debt
- Some larger clients prefer dealing with limited companies, which can limit opportunities
2. What is a limited company (Ltd.)?
A limited company is a separate legal entity from the people who run it.
This means your liability is limited: if the company owes money, your personal assets are generally protected. Limited companies (Ltd.) also come with more admin and responsibilities, but they can be more tax efficient as your income grows.
How to set up a limited company
To operate as a limited company, you need to register your company with Companies House.
You’ll need a company name, at least one director, and at least one shareholder. The company must file annual accounts and a company tax return, and it pays corporation tax on profits.
Advantages of a limited company
- Liability is limited: your personal assets are separate from the company’s debts
- Can be more tax efficient: directors can take a small salary and pay themselves through dividends
- Easier to raise investment or bring in other shareholders
- Often seen as more professional and credible by clients and suppliers
Disadvantages of a limited company
- More admin: annual accounts, statutory filings, and corporation tax returns
- Costs are higher: most small businesses need an accountant to stay compliant
- Less privacy: company details are published on the Companies House register
- Directors have legal responsibilities that can’t be ignored
3. Difference between a sole trader and a limited company (Ltd.)
The main difference between a sole trader and a limited company is how you pay tax, how much admin is involved, and how much risk you personally take on.
A sole trader is self-employed and pays income tax on profits through a self assessment tax return. A limited company is a separate legal entity: it pays corporation tax on its profits, and directors/shareholders take money out through salary and dividends.
| Creative Tip From April 6, 2026, MTD for Income Tax Self Assessment (MTD ITSA) becomes mandatory for sole traders and landlords with income over £50,000, expanding to those with lower income thresholds over time (until April 2028). Sole traders must keep digital records and submit quarterly updates to HMRC through MTD-compliant software, rather than only an annual self-assessment. |
Sole trader and a limited company: how they compare
- Legal status: A sole trader is not separate from the individual. A limited company is a separate legal entity with limited liability.
- Tax: Sole traders pay income tax and National Insurance. Limited companies pay corporation tax, and directors may take a small salary plus dividends.
- Admin: Sole traders keep basic records and file one annual tax return. A limited company must file annual accounts, a corporation tax return, and statutory updates with Companies House.
- Costs: Running as a sole trader is low cost. A limited company may involve more expenses, like accountant fees.
- Credibility: Sole traders are flexible and personal. Limited companies often look more professional and can attract bigger clients.
4. Tax differences that actually matter between a sole trader or a limited company
If you compare a sole trader vs limited company, the biggest factor is often tax. The way you pay tax, how much you pay, and what reliefs you can claim are very different depending on the business structure.
Sole traders pay income tax
- If you’re a sole trader, you report profits through a self assessment tax return.
- Sole traders pay income tax on everything they earn, plus National Insurance contributions.
- The more profit you make, the higher the tax rate: this can push you into higher income tax bands quickly.
Limited companies pay corporation tax
- A limited company is a separate legal entity, so the company pays corporation tax on profits.
- As a company director, you can take a small salary (taxed through PAYE) and then pay yourself dividends.
- Dividends are taxed at lower rates than income tax, which creates a tax saving once profits reach a certain level.
Tax reliefs and allowances
- Sole traders may deduct business expenses, but cannot access the wider tax reliefs available to companies.
- Limited companies may claim tax reliefs, exemptions, and allowances that reduce the overall tax bill.
- Companies can also retain profits in the business, delaying personal tax until money is withdrawn.
When a limited company becomes core tax efficient
- If your profits are modest, staying as a sole trader may be simpler and cheaper.
- Once profits grow, a limited company may deliver better tax savings.
- The tipping point where a limited company becomes more tax efficient than a sole trader is often when profits exceed £40,000 to £50,000, especially once income moves into the higher tax band (above £50,270).
5. Costs and admin you need to know
After you’ve decided to start your business, the next step is choosing between a sole trader vs limited company. The difference isn’t only between tax, but also about how much admin you can handle and what it costs to stay compliant.
Admin for sole traders
- Register as a sole trader with HMRC
- Keep records of income and expenses
- File a self assessment tax return each year
- Pay income tax and National Insurance on profits
- Relatively light admin – many sole traders don’t need a full-time accountant
Admin for limited companies
- Register your company with Companies House
- File annual accounts and a company tax return
- Keep statutory records of directors and shareholders
- Report changes to Companies House (for example, if you change your company name)
- Directors must meet legal responsibilities and deadlines
- Most small businesses hire an accountant to manage this
Costs to consider
- Sole trader: Little to no setup cost, possible accountant fees for a tax return, and insurance depending on the business
- Limited company: Incorporation fee with Companies House, ongoing accountant fees, insurance, and potentially higher admin costs
- Hidden costs: One huge factor is time. Limited company directors often spend more hours on compliance and dealing with paperwork
6. How clients see you when you run your business
It’s not just about tax or admin: the way you set up your business also affects how clients and suppliers see you. The difference between a sole trader and a limited company can shape your reputation.
Sole trader perception
- Seen as flexible, approachable, and personal
- Works well for freelancers, consultants, and small businesses just starting out
- Some larger companies may see sole traders as less formal or riskier to deal with
- Being self-employed often means contracts are simpler, but credibility can be harder to build
Limited company perception
- Operating as a limited company often signals professionalism and stability
- Larger clients sometimes prefer to deal with a limited company for contracts and insurance purposes
- A limited company is a separate legal entity, which can reassure clients about liability
- Having “Ltd” in your company name can make your business feel more established
Which option is best for credibility?
If your business relies on winning bigger contracts or working with corporates, a limited company may open more doors. But if you’re testing an idea, freelancing, or running a small business where relationships matter more than appearances, being a sole trader is often enough.
7. Changing from sole trader to a limited company
Many business owners start as sole traders and later switch to a limited company once profits rise or liability becomes a concern. The process involves registering your company with Companies House, moving your accounts across, and updating HMRC.
We’ve already written a full guide on how to change from being a sole trader to a limited company: covering everything from tax year timing to paperwork and accountant support. You can read that in detail here.
| Creative Tip Two terms – sole trader vs self-employed often get mixed up. But they’re not quite the same. Self-employed is the broad category: it simply means you work for yourself rather than being on someone else’s payroll. Sole trader is one specific way of being self-employed. As a sole trader, you run your business as an individual and are personally responsible for its debts, profits and taxes. |
8. Find out which company structure is good for you with WallsMan Creative
Starting out as a sole trader keeps things simple and flexible. But if your profits are climbing – or you want the added protection and credibility that a company structure brings – moving to a limited company can make sense.
At WallsMan Creative, we help freelancers, small businesses and creatives across the UK figure out what works best for them. We know the ins and outs of your work, since we’re only working with creatives just like you! We know about things you might not even consider: subsidies or tax credits and reliefs you didn’t even hear of.
If you’re deciding if it’s time to make the switch, looking for tax savings, or just want a clear explanation of your options, we’ll cut through the jargon and give you advice that fits your goals.
