25 November 2025 · 6 min read · Bruce Thomas
This is the most common question we are asked, and the honest answer always begins with 'it depends'. Here is what it depends on.
Tax
A sole trader pays Income Tax and National Insurance on all profit, whether or not it is withdrawn. A company pays Corporation Tax on its profit, and the owner is taxed separately on what they extract.
The company therefore has an advantage when profits exceed what you need to live on, because retained profit is taxed only once at company rates. Where you draw everything out, the advantage narrows considerably.
Liability
A sole trader is personally liable for business debts. A company is a separate legal person, so liability is generally limited to what has been invested — though directors can still be personally liable for wrongful trading and lenders often require personal guarantees.
Administration
- Sole trader: one Self Assessment return, simple records, quarterly MTD updates in due course
- Company: statutory accounts, CT600, confirmation statement, payroll for directors, plus personal returns
- Company information is public; sole trader information is not
- Company accounting fees are typically higher, reflecting the extra work
Credibility
Some clients, particularly larger organisations and public bodies, prefer or require a limited company. In parts of construction and professional services it is close to a practical necessity.
Changing later
Incorporating an existing business is straightforward but has consequences: goodwill, assets and any existing contracts all need consideration, and there may be a capital gain on transfer. It is better to model it properly than to do it on the strength of general advice.
This article is general guidance for business owners in the UK and does not amount to advice for your particular circumstances. Tax rules change and the right answer depends on your figures — please take specific advice before acting.
