A sole trader and a limited company can both run a successful trade business. The main differences are legal responsibility, tax, how money is taken out and the records and filings required. There is no turnover or profit figure at which incorporation automatically becomes the right answer.

Who owns the money and owes the debt?

As a sole trader, you and the business are legally the same person. You keep the profits after tax and are personally responsible for business debts.

A limited company is a separate legal person. It owns its money, enters contracts and pays Corporation Tax. The director has legal duties and must follow rules when taking money from the company. Money in the company bank account is not automatically yours to spend personally.

GOV.UK sets out the main differences in choosing a business structure.

Sole trader: simpler, with personal responsibility

Registering as a sole trader normally means registering for Self Assessment. You keep records of income and expenses, report the profit and pay the Income Tax and National Insurance due.

The structure is straightforward, but there is unlimited liability. If the business cannot pay a debt or a claim succeeds against it, personal assets may be at risk. Appropriate insurance still matters whichever structure you use.

Read how to register as a sole trader and how sole-trader tax works.

Limited company: separation with more duties

A company is legally separate from its owners. Limited liability can reduce a shareholder's exposure to company debts, but it is not complete personal protection. A director can still be liable in some circumstances, and lenders or suppliers may ask for a personal guarantee.

Directors must keep company records, prepare annual accounts, complete the Company Tax Return, pay Corporation Tax and keep Companies House information current. A confirmation statement is required at least every 12 months. Hiring an accountant does not transfer the director's legal responsibility.

See GOV.UK's guide to running a limited company.

Do not compare tax rates on their own

A sole trader pays Income Tax and National Insurance on taxable profit. A company pays Corporation Tax on its profits, then there may be personal tax and National Insurance consequences when a director takes salary, dividends, benefits or loans.

Corporation Tax has different rates and reliefs depending on profit and circumstances. A headline company tax rate does not include every cost of getting that money into your personal account. An associated company or a shorter accounting period can also change the thresholds that apply.

Those percentages do not prove that a company is cheaper. The timing and method of taking money, pension plans, other income, accountancy costs and future plans can change the result. Ask an accountant to compare the same figures under both structures.

Check the current Corporation Tax rates and allowances.

Think about how the business operates

A company may fit better when you want to bring in another owner, retain profit in the business, tender for contracts that require a company or create clearer separation between personal and business finances.

A sole trader structure may fit when the work and finances are straightforward and the extra company filings would add cost without a clear benefit.

Consider these questions:

1. How much profit do you need to take out personally each year?

2. Will profit remain in the business for vehicles, equipment or growth?

3. What liabilities arise from the work and contracts?

4. Do customers or tender frameworks require a company?

5. Are you prepared for company accounts, Corporation Tax and Companies House filings?

6. Will you add owners, issue shares or seek finance?

7. What would changing existing quotes, contracts, insurance and bank details involve?

CIS applies to both structures

A sole trader or company can be a contractor or subcontractor under CIS. The way deductions are claimed differs. A sole trader normally reports them through Self Assessment. A company normally sets them against PAYE liabilities using its payroll reporting. HMRC explains both routes in claiming CIS deductions.

Read CIS for subcontractors and use HMRC's guidance for the structure you have.

Ask for a comparison using your figures

Take an accountant your expected profit, the money you need to live on, other income, borrowing and plans for equipment or hiring. Ask for a comparison after tax and ongoing accountancy costs, using the same assumptions for each option.

Also ask what happens in a quieter year. A structure that looks attractive while profit is retained may be less useful if you need to draw nearly everything out. The decision should still make sense when the work changes.

Changing structure is possible

Many businesses begin as sole traders and incorporate later. The move is not just a new name. Review contracts, insurance, VAT, CIS, payroll, bank accounts, assets and customer communications. Get advice before transferring vehicles, tools, goodwill or ongoing work.

Written by Chris, founder of TradePilot. General information, not legal or tax advice. Use an accountant or solicitor for a decision based on your circumstances. Last reviewed 16 September 2026 against the official sources linked above.