If you're starting 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 come with advantages and disadvantages, depending on your business goals, income level, and risk appetite. 

At East London Accountants, we help entrepreneurs and small business owners make informed decisions about their business setup. Here's a detailed comparison to help you decide which structure is right for you. 

What Is a Sole Trader? 

A sole trader is the simplest business structure. You run the business as an individual and are personally responsible for its debts and obligations. 

Key Features: 

• Easy to set up and run 
• You keep all profits (after tax) 
• You're personally liable for any losses or debts 
• Must register for self-assessment with HMRC 

What Is a Limited Company? 

A limited company is a separate legal entity from its owners (shareholders). Directors manage the company and are responsible for its legal compliance. 

Key Features: 

• Separate legal status from owners 
• Limited liability for directors/shareholders 
• Profits can be distributed via salary and dividends 
• Must register with Companies House and file annual accounts 

Sole Trader: Pros and Cons 

Advantages: 

• Simple and inexpensive to start 
• Less administrative burden 
• Full control over business decisions 
• No need to file annual accounts (just a self-assessment return) 

Disadvantages: 

• Unlimited personal liability for business debts 
• Higher income tax rates once profits increase 
• Less credibility with banks or larger clients 
• Limited options for raising capital 

Limited Company: Pros and Cons 

Advantages: 

• Limited liability—your personal assets are protected 
• Tax efficiency through dividends and salary split 
• Greater credibility and professionalism 
• Easier to attract investment or funding 

Disadvantages: 

• More paperwork and compliance obligations 
• Higher setup and accountancy costs 
• Annual filings with Companies House and HMRC 
• Less privacy (details are publicly available) 

Tax Differences 

Sole Trader: 

• Pays Income Tax and National Insurance on all profits 
• Fewer allowable expenses for tax relief 

Limited Company: 

• Pays Corporation Tax (currently 19–25%) on profits 
• Director pays tax on salary and dividends 
• Can be more tax-efficient with the right planning 

When to Choose a Sole Trader Structure 

• You're just starting out or testing a business idea 
• You want low admin and setup costs 
• Your profits are below £30,000 per year 
• You’re not exposed to high financial risk 

When to Choose a Limited Company 

• Your business is growing or already profitable 
• You want to protect your personal assets 
• You work with corporate clients or government contracts 
• You want to minimise tax through dividends 

Switching Between Structures 

You can start as a sole trader and incorporate later once your business grows. We help many clients transition smoothly from sole trader to limited company—handling all Companies House and HMRC paperwork. 

How East London Accountants Can Help 

We’ve helped hundreds of clients across London: 

• Set up their business structure 
• Register with HMRC or Companies House 
• Navigate tax rules and obligations 
• Maximise profits with smart tax planning 

Whether you choose to go solo or incorporate, our experienced team will guide you every step of the way. 

Book a Free Startup Consultation 

Still unsure which structure suits your goals? Book a free consultation with East London Accountants today. We’ll help you make the right choice for your business and ensure you start on the strongest financial footing.