Sole trader or limited company?

The genuine differences

Everything else follows from one fact: a sole trader is the business, and a limited company is a separate legal person that you own.

Liability

As a sole trader, business debts are your debts. If the business cannot pay, creditors can pursue your personal assets. As a director and shareholder of a limited company, your liability is generally limited to what you have invested.

That protection is real but not absolute. Directors can be personally liable for wrongful trading, and lenders routinely ask company directors for personal guarantees — at which point the protection you incorporated for is signed away for that particular debt.

Tax

A sole trader pays Income Tax and National Insurance on business profits through Self Assessment. A limited company pays Corporation Tax on its profits, and you then pay personal tax on whatever you extract as salary or dividends.

The company route often works out more efficient once profits are comfortably into the tens of thousands — commonly cited as somewhere around the £30,000 to £40,000 mark — because of how salary and dividends can be combined. But that crossover moves with every Budget, and it depends on how much you need to draw versus how much you can leave in the business.

Admin

Sole trader: a Self Assessment return each year, and Making Tax Digital obligations if your income is above the threshold.

Limited company: annual accounts and a confirmation statement to Companies House, a Corporation Tax return to HMRC, payroll if you take a salary, and your own Self Assessment on top. Most directors use an accountant, and that is a real annual cost.

Privacy

This one surprises people. Company directors appear on the public Companies House register along with a service address, month and year of birth, and shareholding. Under identity verification requirements now in force, directors must also verify their identity. Sole traders have no equivalent public record.

If anonymity matters to you, this is a genuine consideration rather than a footnote. A service address rather than your home address is the usual mitigation.

Credibility

Some clients — larger companies, public sector buyers, certain agencies — prefer or require suppliers to be limited companies. Whether this affects you depends entirely on your market. In many trades it makes no difference at all.

What it means for your bank account

A limited company needs its own account, and providers will check the Companies House record matches your application exactly. A sole trader has more freedom in principle, but personal account terms usually push you towards a business account anyway.

Worth knowing: some accounts restrict company structures. Monzo requires all directors and persons of significant control to be UK residents. Mettle limits how many owners a company can have. HSBC Kinetic is single-director only. If you incorporate with a co-founder, check that your preferred account still accepts you.

A reasonable way to decide

1. Is your work risky? If a mistake could produce a claim larger than you could pay, limited liability matters. Weigh it alongside professional indemnity insurance rather than instead of it.
2. What are your profits, realistically, next year? Below roughly £30,000, incorporation rarely pays for its own admin. Well above it, get advice.
3. Do your clients care? Ask them, rather than guessing.
4. How much admin will you tolerate? Be honest. An accountant costs money; missed filings cost more.
5. Does public disclosure bother you? If it does, factor in a service address.

And remember you can change your mind. Plenty of businesses start as sole traders and incorporate once profits justify it. Going the other way is possible but messier.

Once you have decided, the shortlists differ: best accounts for sole traders and best for limited companies.