One of the very first decisions you will need to make when starting a business in the UK is whether to operate as a sole trader or set up a limited company. For many beginners, this choice can feel a little intimidating, especially when unfamiliar tax and legal terms are involved.
This guide explains, in clear and straightforward terms, what each option means in practice for people who are new to running a business. It helps you understand the differences so you can make an informed decision, without steering you towards a particular choice. Whether you run a business in Farnborough or elsewhere in the UK, the information below applies in the same way.
The Short Answer
It’s important to know that there is no single “right” option for everyone. Some businesses are better suited to operating as sole traders, while others benefit from being limited companies. The best choice for you will depend on how your business is going to operate, how much you expect to earn, and how much administration you are comfortable with.
What Is a Sole Trader?
A sole trader is simply an individual who runs a business in their own name. This is the simplest and most common business structure in the UK, especially for new businesses. As a sole trader, you and your business are treated as the same legal entity. This means you get to keep all the profits after tax, but you are also personally responsible for the business and any of its debts. Many freelancers, tradespeople, and small service businesses start out this way because the setup and ongoing administration are so straightforward.
What Is a Limited Company?
A limited company is a separate legal entity that you register with Companies House. Even if you are the only director and shareholder, the company exists independently from you as an individual. This means the company has its own finances and pays its own tax. As a director, you also have specific legal responsibilities you need to meet. This structure is commonly used by businesses that plan to grow, take on staff, or want a clear separation between their personal and business finances.
How Setup and Registration Differ
This part is much simpler than it might sound. The way you set up your business just depends on the structure you choose.
- Sole traders simply need to register with HM Revenue & Customs (HMRC) for Self Assessment once they start trading.
- Limited companies must first be registered (or ‘incorporated’) with Companies House before they can trade. After that, they also need to register with HMRC for Corporation Tax.
Registering as a sole trader is free. Registering a limited company involves a Companies House fee, which is £100 for a standard digital application as of February 2026.
How Tax Works (High Level)
Tax is one of the main reasons people spend time considering this decision, but you don’t need to be an expert at this stage. The key is to understand that the two structures are taxed differently.
Sole traders
As a sole trader, you pay income tax and National Insurance contributions on the profits your business makes. You report all of this to HMRC on a Self Assessment tax return once a year.
Limited companies
With a limited company, the company itself pays Corporation Tax on its profits. If you then take money out of the company (for example, as a salary or dividends), you may have to pay personal tax on it. There are also a few more reporting requirements.
At this stage, the most important thing is to be aware that the tax system works differently for each structure. The exact figures will always depend on your personal circumstances.
Responsibility and Risk
This is another key difference, and it’s an important one to understand. It’s all about how responsibility for business debts works.
- As a sole trader, you are personally responsible for all business debts. This is known as unlimited liability.
- A limited company provides a degree of separation between your personal and business finances. This is known as limited liability.
This does not mean that running a limited company is risk-free. Directors can still be held personally liable in certain situations (for example, in cases of fraud or if they have given a personal guarantee for a business loan). However, the legal structure provides a layer of protection that simply doesn’t exist for sole traders.
Administration and Ongoing Work
Running a business always involves some paperwork, whichever structure you choose, but the level of that paperwork differs quite a bit.
- Sole traders generally have simpler record-keeping and only need to file a Self Assessment tax return once a year.
- Limited companies have more duties, such as filing annual accounts and a confirmation statement with Companies House, as well as a separate Company Tax Return for HMRC.
Some people prefer the simplicity of the sole trader setup, especially when they are just starting out. Others are comfortable with the additional administration in return for the formal structure and protection that a limited company offers.
Which Option Is Best for Beginners?
Many people start as sole traders because it is so simple and flexible. Others choose to set up a limited company from day one because of their long-term plans or the industry they are in. What matters most is choosing the option that feels right for you, your business, and your future goals.
It’s also reassuring to know that you can change your business structure later on if your circumstances change.
When Advice Can Be Helpful
You are not required to speak to an accountant before choosing a business structure. However, getting advice can be helpful if you expect your income to grow quickly, you are unsure how tax will apply to you, or you would just like some reassurance before you commit to a structure.
If you would like calm, practical support as your business develops, Penney’s Accountancy works with UK small businesses in Farnborough and the surrounding areas, helping owners understand their responsibilities and make confident decisions at every stage.
Want to Learn More in Your Own Time?
For those who want to build their confidence and understand these topics in more detail, Penney’s Finance School offers an online, self-paced business and finance course. It covers everything from company setup to cash flow and tax, allowing you to learn at your own pace.
Important information
The information provided in this article is intended as general guidance for UK businesses only and reflects UK tax legislation and HMRC guidance as of February 2026.
Tax rules and business requirements can change, and individual circumstances vary. Before acting on any of the information above, we recommend speaking to a qualified accountant who can provide advice tailored to your specific situation. If you would like calm, practical support as your business develops, Penney’s Accountancy works with UK small businesses in Farnborough and the surrounding areas, helping owners understand their