Should You Be a Sole Trader or a Limited Company?

Choosing the Right Structure for Your Business

If you’re starting a business or going self-employed, one of the first big decisions you’ll face is how to set up — should you be a sole trader or form a limited company? It’s a choice that affects your tax, legal responsibilities, and even how professional you appear to potential clients.

In this guide, we’ll break down the pros and cons of each option to help you decide what’s right for you.

The Basics: What’s the Difference?

Sole Trader
A sole trader is the simplest way to run a business. You work for yourself, keep the profits, but you’re personally responsible for any debts or legal issues.

Limited Company
A limited company is a separate legal entity. You’re still the business owner (often also the director), but the company’s finances are separate from your personal money. Your personal liability is limited.

The Pros & Cons of Each Option

✔️ Sole Trader — Simple & Flexible

Advantages:

• Easy to set up — register with HMRC and you’re ready to go

• Fewer reporting requirements

• You keep all the profits (after tax)

• Privacy — your details aren’t published on Companies House

Things to Watch Out For:

• You’re personally liable for business debts

• Less tax-efficient as profits grow

• Some clients (especially larger companies) prefer dealing with a limited company

• Can feel less “professional” to some customers

✔️ Limited Company — Professional & Tax-Efficient

Advantages:

• Limited liability — your personal assets are protected if things go wrong

• Potentially more tax-efficient, especially as profits increase

• Looks more established and credible to clients and suppliers

• Some tax planning options, such as paying yourself via salary and dividends

Things to Watch Out For:

• More admin — you’ll need to file annual accounts and confirmation statements with Companies House

• Your company details (including directors’ names) are publicly available

• Separate company bank account and financial records required

• Potential extra costs for accountancy and compliance

How Do You Choose?

There’s no one-size-fits-all answer — it depends on your plans, earnings, and appetite for admin.

Here are some helpful questions to ask:

✅ Are you testing the waters with a side hustle or planning a full-time business?
➡️ If it’s small and simple, sole trader may be easier.

✅ Do you expect to make over £30,000–£50,000 profit soon?
➡️ At that level, the tax advantages of a limited company often outweigh the extra admin.

✅ Do you want to look more professional to win bigger clients?
➡️ Many contractors and agencies prefer working with limited companies.

✅ Are you worried about personal risk?
➡️ A limited company offers legal protection if the business runs into trouble.

✅ Are you comfortable managing company accounts or paying an accountant to help?
➡️ If not, staying as a sole trader may feel less overwhelming.

Can You Change Your Mind Later?

Yes! Many businesses start as sole traders and switch to a limited company as they grow. Others incorporate from day one for peace of mind.

An accountant can help you make the change smoothly when the time’s right.

Need Help Deciding?

Setting up your business the right way gives you confidence and avoids headaches later.

At Carr Accounting Studio, we help sole traders and startups across the UK choose the best structure for their business — with plain-English advice and clear support every step of the way.

Want clear, expert help? Let’s have a no-pressure chat.
Book a call — we’ll help you get set up with confidence.