One of the first decisions every new business owner has to make is how to register their business.
The choice between sole trader and limited company affects your tax, responsibilities and how your business grows. Getting it right in the first instance can save a lot of time further down the line.
There’s no one-size-fits-all answer, but understanding the differences helps you make an informed decision for your business. This blog explains why.
What does being a sole trader mean?
Sole trader is simplest structure for a business, making it popular with first time business owners.
As a sole trader, you run the business as an individual and keep any profits after tax. There’s no legal separation between you and the business. As a result, the money coming in is legally yours and you can independently make any decisions about the business without friction or administrative obligations in most cases.
However, the trade-off for this simplicity is that you’re also personally accountable for any debts or legal cases brought against the company, and your personal assets might be at risk if something goes wrong.
How sole traders are taxed
As a sole trader, you’ll be eligible to pay Income Tax and National Insurance on your profits, via Self-Assessment. Your profit is considered to be your income minus any allowable business expenses.
This means that tax reporting is relatively straightforward and doesn’t require too much administration time.
The process may be complicated slightly if your total income before expenses totals £90,000 or more, at which point, you’ll need to register for VAT. This is an additional tax you’ll need to pay on any product or service you sell. A qualified accountant, like Buckler Spencer, will be able to advise you on this when the time arises.
How to register as a sole trader
To become a sole trader, you’ll need to register with HMRC for Self-Assessment. You’ll receive a Unique Tax Reference number (UTR) which is specific to you. This will be used to calculate your tax when you fill out your end of year Self-Assessment.
It’s worth noting that this system will be changing from April 2026, when some sole traders will be eligible to switch to quarterly reporting under the new Making Tax Digital guidelines.
What does being a limited company mean?
As a limited company, you and your business are separate legal entities. You can pay yourself as a company director, as well as through owning shares in the company, but the profits legally belong to the company, rather than to you personally.
This makes administration considerably more complex. You must produce annual accounts and confirmation statements, complete Corporation Tax returns, and take responsibility for payroll.
However, because the company is separated from you as an individual, you limit your personal liability. If the business falls into financial difficulty, your personal assets are protected.
How limited companies are taxed
Tax in a limited company is far more complex than for a sole trader.
You’ll need to pay Corporation Tax on any profits. Most directors chose to pay themselves a lower salary and boost their annual income with dividends as a shareholder in the company. Limited companies can be more tax efficient as profits increase. They must register on Companies House, which has an associated cost of around £50. You’ll also need to set up payroll if you plan to pay yourself a salary (or if you have any employees).
Which structure is right for your start-up?
If you’re brand new to business and working on a small scale, it can often be beneficial to start as a sole trader. This offers simplicity and minimises admin in the early days when you want your focus to be on building a profitable business.
As long as your profits remain fairly low, this often makes the most sense for many individuals.
A limited company offers benefits if you plan to scale quickly, hire staff or seek external funding. It can often lend your business a little more credibility, making it appear more established and more professional in the eyes of customers, suppliers and lenders.
As your profits grow, it can quickly become more tax efficient to exist as a limited company. Expert guidance from a qualified accountant can help you identify how to best leverage the systems at your disposal to make your business more tax efficient.
How Buckler Spencer can help you decide
If you’re puzzling over which structure works best for your needs, Buckler Spencer offers tailored advice, reviewing your business plans, income expectations and long-term goals to help decide which would best suit your needs.
We can also offer ongoing support with registration, tax setup, ongoing compliance and advice as your business grows. To benefit from our years of experience helping small businesses like yours to grow, get in touch today to book a consultation.