Should I be a sole trader or a limited company?

As a sole trader, you and the business are legally the same person. If the business can't pay a supplier, a landlord or a customer's claim, they can pursue your personal savings and assets. Insurance helps, but it won't cover everything.

A registered company is a separate legal person (section 16 of the Companies Act 2006). It owns its assets, signs its contracts and owes its own debts. In a company limited by shares, shareholders are only liable for any amount unpaid on their shares (section 3 of the Companies Act 2006).

Limited liability has limits:

• Personal guarantees you sign for a lease, loan or supplier account make you personally liable anyway.
• Wrongful trading: a director can be ordered to contribute personally if they kept trading after they knew, or should have concluded, that insolvent liquidation couldn't reasonably be avoided (section 214 of the Insolvency Act 1986).
• Directors' duties: directors must act in the company's interests, including the duty to promote its success (section 172 of the Companies Act 2006).

Sole trader. You pay Income Tax and National Insurance on your profits through Self Assessment. You must register once you earn more than £1,000 from self-employment in a tax year, and tell HMRC by 5 October after the end of the tax year you started in. Making Tax Digital for Income Tax applies from 6 April 2026 to sole traders with qualifying income over £50,000, and is due to extend to those over £30,000 from April 2027 and over £20,000 from April 2028. In Scotland, Scottish Income Tax rates apply to your profits.

Limited company. The company pays Corporation Tax on its profits. For the financial year starting 1 April 2026, the rate is 19% on profits up to £50,000 and 25% on profits over £250,000, with marginal relief in between. You then pay personal tax on what you take out, either as salary through PAYE or as dividends. For 2026 to 2027, dividends above the £500 allowance are taxed at 10.75%, 35.75% or 39.35% depending on your tax band.

Whether a company saves you tax depends on your profit, how you pay yourself and your other income. An accountant can run the numbers for your situation.

A sole trader has no public filings. A company is formed by registering at Companies House under the Companies Act 2006, which costs £100 online. After that it must:

• file annual accounts, usually within 9 months of the end of its financial year, or 21 months after registration for the first accounts (section 441 of the Companies Act 2006)
• file a confirmation statement at least once every 12 months, currently £50 online (section 853A of the Companies Act 2006)
• keep its registers, including people with significant control, and tell Companies House about changes to directors
• file a Company Tax Return with HMRC within 12 months of the end of its accounting period
• keep a registered office address and a registered email address

Directors' names, service addresses and month and year of birth appear on the public register, along with the company's accounts. Directors stay responsible for all of this even if an accountant does the filing.

Identity verification at Companies House became a legal requirement on 18 November 2025. Directors and people with significant control must verify their identity and give their Companies House personal code.

• New directors give their code when the company is incorporated or when they are appointed.
• Existing directors give theirs in the company's next confirmation statement. Companies House won't accept the statement until every director has verified.

Verification is free through GOV.UK One Login, using the app, online checks or a Post Office visit. You can also pay an authorised corporate service provider to verify you. Most people only need to do it once. Sole traders don't need to verify.

Common reasons to move from sole trader to company:

• profits have grown to the point where Corporation Tax plus dividends may cost less than Income Tax and National Insurance
• you're taking on bigger contracts, staff, premises or other risks
• clients or platforms will only deal with a company
• you want to bring in co-founders or investors, which needs shares
• you may want to sell the business one day

Switching means forming a company and moving the business into it: contracts, assets, bank accounts and any staff. Some customer and supplier contracts need the other side's consent to transfer, and employees usually move across on their existing terms. Get tax advice before the transfer and update your HMRC registrations.