If you're planning to start a business in the UK, one of the first decisions you'll face is whether to operate as a sole trader or set up a limited company. Both structures are popular, but they differ in tax, liability, and the way you run your business. Here's a clear breakdown to help you choose the right path.
Sole Trader
A sole trader is the simplest way to run a business. You are the business, which means you keep all profits after tax but are also personally responsible for any debts or losses. Sole traders must register with HMRC and complete a Self-Assessment tax return each year.
Advantages of being a sole trader:
- Easy and inexpensive to set up.
- Full control of decisions and profits.
- Less paperwork compared to a limited company.
Disadvantages:
- Unlimited liability – your personal assets are at risk if the business has debts.
- May be seen as less professional by some clients.
- Tax rates can be higher once profits grow.
Limited Company
A limited company is a separate legal entity. This means your personal finances are protected, and your liability is limited to the amount you invest. Limited companies must register with Companies House, file annual accounts, and follow stricter reporting rules.
Advantages of a limited company:
- Limited liability protects personal assets.
- Potentially more tax-efficient for higher profits.
- Professional image and easier to secure funding.
Disadvantages:
- More administration and legal responsibilities.
- Higher accountancy costs.
- Profits must be distributed through salary or dividends.
Which is Right for You?
If you want to keep things simple, starting as a sole trader is often the best first step. But if you're looking to grow, raise investment, or protect your personal assets, a limited company may be the smarter choice.
At P&K Associates, we help entrepreneurs in Edgware, Barnet, Harrow, and across North London decide the best structure for their business. Contact us today for expert guidance on setting up and managing your accounts.