Business Start-ups: Sole Trader or Limited Company?

Picture the scene: you've had a great idea and spotted a gap in the market from a new, growing trend. Or maybe you've left your job and plan to offer your services directly instead. Now is a great time to start a business - but should you operate as a sole trader or limited company?

The answer is: it depends.

The option that is best for you will depend on a variety of factors such as:

• The level of control you want

• The amount of privacy you desire

• How much administration you are comfortable with

• The tax burden you anticipate

• The legal liability you want to accept

• The credibility needed to trade successfully

• What access to funding is required for growth and liquidity

To help with decision making, see our tables below which consider pros and cons, suggestions related to common scenarios and cost and earnings comparisons.

Sole trader or Limited company? Which is best for you will depend on a variety of factors

Pros and Cons of Starting as a Sole Trader or Limited Company

	Sole Trader	Sole Trader	Ltd Company	Ltd Company
	Pros	Cons	Pros	Cons
Setup	Very easy and quick to set up	Less credibility with some clients	More credible, professional image	More administration
Costs	Minimal setup and admin costs	No separation of personal and business finances	Potential tax efficiency (e.g., dividends)	Higher accountancy and admin costs
Taxation	Simple personal tax (Self Assessment)	Higher tax rates at higher incomes	Corporation tax can be lower than personal tax	Must file annual accounts and corporation tax returns
Legal Liability		Full personal liability and risk to personal assets	Limited liability – personal assets protected	Directors have legal responsibilities
Privacy	Financial affairs stay private	Less formal structure might limit growth	Company details publicly listed at Companies House	Less privacy – financials visible to public
Management & Control	Full control over business decisions	Sole responsibility for business issues	Ability to share ownership, attract investors	Need to meet company regulations and compliance
Funding	Simpler to manage without investors	Harder to attract investment	Easier to secure funding or investment	Complexity in issuing shares and managing shareholders
Profit Withdrawal	Take profits as personal income	Pay income tax on all profits	Can take a combination of salary and dividends (more tax efficient)	Dividend tax applies after a threshold
Exit/Selling	Business linked to individual	Harder to sell business	Company structure easier to sell or transfer	Need formal processes for sale or closure

Summary Recommendations for Common Situations

Situation	Recommended Structure	Why?
Freelancer / small side hustle	Sole Trader	It's simple, low-cost, and flexible. You can focus on doing the work without heavy admin. Ideal if income is modest and risk is low.
Full-time self-employed (moderate income around £40k)	Start as Sole Trader, consider switching later	It's easy to start, and if your income grows or risks increase, you can later form a limited company without too much hassle.
High-risk business (e.g., manufacturing, products, big contracts)	Limited Company	Protects your personal assets from business debts and lawsuits. Adds professional credibility, important when dealing with larger clients.
Start-up aiming to grow and attract investors	Limited Company	Essential if you want to raise money, issue shares, or look serious to investors, partners, and banks.
High personal income (approaching £50k+ per year)	Limited Company	More tax-efficient through a mix of salary and dividends; can significantly reduce personal tax liability compared to sole trader rates.

Cost Comparison - estimated

Cost Item	Sole Trader	Limited Company
Setup Cost	£0 – Free (just register for Self-Assessment with HMRC)	£50 online incorporation with Companies House (more if using a formation agent)
Annual Filing	£0 - Free (just Self-Assessment tax return)	£34 confirmation statement fee (online), plus Corporation Tax Return (may need an accountant)
Accountant (optional but recommended)	£250 – £800/year (depending on complexity, assumes below VAT threshold)	£500+/year (more complex filing: accounts, payroll, corporation tax, dividend vouchers)
Bookkeeping Software (optional)	£0–£15/month	£10–£50/month (depending on complexity
Taxes Payable	Income tax + Class 2 and Class 4 NICs	Corporation tax (19–25%) + personal tax on salary/dividends
Insurance (Public liability, Professional Indemnity etc.)	Same for both (depends on business type)	Same for both (depends on business type)
Estimated annual totals	£300 - £700	£700 - £2,500

Approximate Earnings Comparisons at £40k and £80k

	Sole Trader	Ltd Company	Sole Trader	Ltd Company
Gross Profit	£40,000	£40,000	£80,000	£80,000
Director salary		£12,570		£12,570
Net Profit	£40,000	£27,430	£80,000	£67,430
Less: Taxes	20% income tax after £12,570 personal allowance = £5,486 Class 2 NIC (voluntary) = £179 Class 4 NIC = £1,646	Corporation Tax at 19% = £5,212	20% income tax after £12,570 personal allowance to £50,270 then 40% = £7,540 + £11,892 Class 2 NIC (voluntary) = £179 Class 4 NIC = £2,262 + £595	Corporation Tax at marginal rate = £14,118
Dividends		£22,218		£53,312
Dividends Tax (£500 tax free)	-	At 8.75% = £1,900		£500 at 0%, £49,770 at 8.75% and £3,072 at 33.75% = £4,355 + £1,037
Estimated Final Take-Home	£32,690	£32,890	£57,530	£60,490

(Please note that these are approximate calculations and the figures could be impacted by many other factors, for example, additional income received by directors)

Key Points:

• At £40k profit: Saving is small, maybe not worth extra admin if you want simple life.

• At £80k profit: Saving is greater — definitely worth considering a Limited Company.

• Plus a limited company will help provide personal asset protection

Points to note:

Profitability calculations are dependent on tax rates which may change.

This document is a simplified helpsheet and careful research should be completed if you are unsure.

Need more information? Contact us today for tailored help and advice.

Verifiable Accounts - qualified accountants providing accounting, bookkeeping, tax and business advisory services.