What is the difference between a sole trader and limited company?
A sole trader and a limited company are different legal and reporting structures, not simply two tax rates. A sole trader owns the business personally; a company is a separate legal person. Liability, administration, how money is taken out, ownership plans and total tax all matter.
Last reviewed: 3 September 2026 · Editorial policy
Sole trader is simpler
Sole trader admin is usually lighter. You still need good records and tax returns, but there are fewer Companies House obligations.
Limited companies add structure
A company can offer limited liability, different tax planning options, and a more formal structure for ownership. It also brings more filing duties and director responsibilities.
Liability and ownership
A sole trader signs contracts and owns assets personally, so business debts and claims can generally reach personal assets. A company normally owns its assets and owes its debts itself, although limited liability is not absolute: personal guarantees, wrongdoing and some director breaches can still create personal exposure.
A company can issue shares and continue through changes of shareholder or director. That can make shared ownership, investment and succession easier to document. A sole-trader business can still employ people and use a trading name, but the legal owner remains the individual.
Tax follows different routes
A sole trader normally pays Income Tax and National Insurance on taxable business profit, whether or not the cash remains in the business. A company pays Corporation Tax on its taxable profits; the owner may then face personal tax and National Insurance depending on salary, dividends, benefits, loans or other withdrawals.
That means “companies save tax” is not a reliable rule. Compare the combined company and personal position, accountancy costs, pension plans, other income and how much cash must be withdrawn. Tax rates and allowances change, so rerun the comparison rather than relying on an old salary-and-dividend example.
Administration and privacy
Sole traders keep business and Self Assessment records. Companies also maintain statutory records, file accounts and confirmation statements with Companies House, operate Corporation Tax processes and document certain decisions and payments. Directors remain responsible even when an accountant is appointed.
Company information and filed accounts are available through the public register, subject to the filing regime. Consider that visibility alongside the value of a separate legal identity.
Questions that point to the right structure
Choose based on the next few years rather than this month’s tax bill. Useful questions include whether the work carries material contractual risk, clients require a company, another person will own part of the business, profits will be retained, finance is needed, or a sale is plausible. Take legal advice as well as tax advice where liability or ownership drives the choice.