Estimated reading time: 3 minutes
Introduction
One of the first decisions many business owners face is whether to operate as a sole trader or through a limited company. Both structures have advantages, but they differ in how profits are taxed, legal responsibilities and administration.
Key Points at a Glance
- Sole traders and limited companies are taxed differently.
- A sole trader and the business are legally the same entity.
- A limited company is a separate legal entity.
- Limited companies have additional reporting and record-keeping obligations.
- The best structure depends on your circumstances.
What is a Sole Trader?
A sole trader runs their business as an individual and is personally responsible for the business. They must:
- Register for Self Assessment.
- Keep accurate business records.
- Submit tax returns (or MTD obligations where applicable).
- Pay Income Tax and National Insurance on taxable profits.
What is a Limited Company?
A limited company is a separate legal entity from its owners and pays Corporation Tax on its taxable profits. A limited company must:
- Keep company records.
- Prepare annual accounts.
- File a Company Tax Return.
- Pay Corporation Tax.
- Meet Companies House filing requirements.
How Are They Taxed?
Sole Traders
Sole traders pay Income Tax and National Insurance through Self Assessment on taxable business profits.
Limited Companies
Limited companies pay Corporation Tax. Directors and shareholders are taxed separately on salaries, dividends or other income.
Administration and Record Keeping – Limited Companies must:
- Prepare statutory accounts (limited companies).
- File confirmation statements.
- Keep company registers.
- File Corporation Tax returns.
- Operate payroll where appropriate.
Which Structure is Right for You?
There is no one-size-fits-all answer. Sole traders often benefit from simpler administration, while limited companies may suit growing businesses or those seeking limited liability.
How We Can Help
We can advise on the most suitable structure, register your business, incorporate companies, establish bookkeeping and payroll systems, and support your ongoing compliance.
Further Reading (HMRC & GOV.UK)
- Set up as a sole trader – https://www.gov.uk/set-up-sole-trader
- Self Assessment tax returns – https://www.gov.uk/self-assessment-tax-returns
- Set up a limited company – https://www.gov.uk/limited-company-formation
- Running a limited company – https://www.gov.uk/running-a-limited-company
- Corporation Tax – https://www.gov.uk/corporation-tax
Disclaimer
This article is intended as general guidance only and is based on HMRC and GOV.UK guidance available at the time of writing. Tax legislation and HMRC guidance may change, and individual circumstances differ. Please contact us if you require advice specific to your situation.
Last reviewed: July 2026
