Trusted by over 400,000 with their insurance needs
Our service is rated ‘Excellent’ on Feefo
Over 2000 insurance specialists ready to support you
What’s The Difference Between A Sole Trader And A Limited Company?
What’s The Difference Between A Sole Trader And A Limited Company?
When you register your business, you have some choices to make as to what sort of company you will be. Most small businesses in the UK are either registered as a sole trader or a limited company, but what’s the difference between the two?
Registering as a sole trader
For individuals running a business, setting up a sole trader is the simplest way to get going and is restricted by less rules than other types of businesses. This option may be suitable when one person owns the whole business. You can also have people work for you. This option may typically suit:
- Hairdressers
- Tradesmen
- Butchers
- Creative freelancers
- Photographers
- Taxi/delivery drivers
- Gardeners
- Professional consultants
Setting up as a sole trader typically suits those:
- With a smaller business and lower earnings
- Who don’t want the extra paperwork and legal responsibilities of a limited company
- Who are just starting out and want to test the business idea first.
What about finance?
Sole traders may typically finance their business through bank loans, loans from friends and family and personal savings. They keep all business profit after income tax and National Insurance. Sole traders are also personally responsible for any business debt. This is often referred to as ‘unlimited liability’. This means that if money is owned, they are liable to pay it back.
Administration and reporting
Unlike other types of businesses, sole traders are not required to file their accounts to Companies House and typically face reduced admin costs. They are required to keep full financial records for the business and are required to register a Self-Assessment tax return each year.
Sole traders make all business decisions, allowing owners full control. This allows them to easily make strategic decisions and react quickly to economic shifts and trends in the market.
Registering as a limited company
Unlike sole traders who are liable for every aspect of their business, a limited company is a separate legal entity from its owners. This means that the company owns things like contracts and money and is responsible for its own debts, rather than the people behind it. The company itself can be owned by one or more people – referred to as shareholders - who each own a percentage of the business. This percentage is determined by how many shares each person holds.
Many people choose to set up a limited company because it offers financial protection and can be more tax efficient. The type of businesses that may be suited to being a limited company may include:
- Consultants
- Marketing and design agencies
- Freelancers and contractors earning over £50,000 a year
- Online and physical shop owners
- Small manufacturers
- Private healthcare providers
- Gyms
- Landlords and estate agents
Setting up as a limited company may typically suit:
- Business with higher earnings wanting to pay less tax
- Those looking to attach liability to the business rather than themselves
- Those wanting to put across a more professional image.
What about finance?
Unlike sole traders, limited companies are subject to corporation tax on its profits. Owners then pay income tax on salary and dividend tax on dividends. This approach can sometimes be more tax efficient. If the company gets into debt, the owner’s personal money remains safe, they only risk losing what they put into the company.
Administration and reporting
Limited companies are required to register to Companies House, file annual accounts, submit a confirmation statement and follow more legal rules. This differs from sole traders who are only required to file a self-assessment tax return each year and don’t need to register to Companies House.
Registering as an umbrella company
Umbrella companies are most often used by businesses that act as an employer for temporary or contract workers. They handle administrative duties including payroll, tax deduction and administrative tasks on behalf of the contractors. Many businesses set up umbrella companies in response to changes in IR35, helping them to stay compliant with the changes by paying them as employees. This option is typically used by:
- Banking contractors
- IT consultants
- Agency healthcare workers
- Construction workers
Insuring your company
Once you’ve decided how to set up your company, one of the next important decisions is your insurance. For those offering advice, services or expertise, professional indemnity insurance is essential. You are required by law to take out Employers Liability insurance once you become an employer.[i]
To help you get started, it’s wise to speak to an insurance broker. At Towergate Insurance, we’re experienced in helping start-up businesses get they cover they need to grow, with the confidence they have a considered risk strategy in place.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems, we recommend that professional advice be sought.
Sources
What does it mean to be a ‘limited’ company? – Companies House
Working through an umbrella company - GOV.UK
PayStream Umbrella Company | What is an Umbrella Company?
About the author
Alison Wild BCom (Hons), FMAAT, MATT, Taxation Technician is a highly respected industry professional who has been working with and advising SMEs in areas including tax, pensions, insurance and marketing for over 25 years. She is a Fellow member of the Association of Accounting Technicians (AAT) and Association of Tax Technicians (ATT) and also has 20 years' experience as a residential landlord.
Date: May 28, 2025
Category: Small Business
