Business structures
How sole trader, partnership, and limited company differ — and how to choose between them.
Articles
Sole trader vs limited company
How the two main UK business structures differ, and how to decide which one suits you.
Sole trader vs limited company 2026/27: which is more tax efficient now the dividend rates have risen?
The Budget 2025 dividend tax rise (effective 6 April 2026) has narrowed the tax advantage of running a limited company. Worked numbers at £40k, £60k and £100k profit, the new indifference point, and the non-tax factors that still matter.
Sole trader or limited company?
A sole trader is the simplest machine: you are the business, profits are yours, taxed once through Self Assessment, minimal filing. A limited company is a separate legal person: limited liability, Corporation Tax on profits, and a second decision about how to pay yourself — with more filing and less privacy in exchange.
Neither is 'better'. At modest profits, simplicity usually wins. As profits grow past what you spend, or risk grows past what you can shoulder personally, the company case builds. Partnerships and LLPs cover the multi-founder versions of the same trade-offs.
The factors that actually decide it
Tax is only one axis, and rarely the decisive one at the start. Liability: does the work carry risk a company should absorb? Credibility: do your target customers expect to contract with a company? Investment and growth: outside money and shared ownership need share capital. Profit retention: will you leave money in the business, where Corporation Tax rates beat higher-rate Income Tax?
A contractor whose clients require a limited company has had the decision made for them. A sole trader earning what they spend, serving the public, has too — the other way.
Changing your mind later
Sole trader to company is a routine, well-trodden incorporation — best done deliberately at a year end, with the trade, assets, and any goodwill moved properly. Company back to sole trader is rarer and messier. Start simple and incorporate when the numbers or the risk justify it; that ordering is cheap. The reverse is not.
What to avoid is drift: incorporating because someone said so, then running the company like a personal bank account. A company only delivers its benefits when run as one.
Getting the decision made properly
This is a numbers-and-facts decision that takes one structured conversation: expected profits, what you need to live on, risk profile, customers, and plans. We run it with every new-business client before anything is registered — structure first, registrations second, because the structure determines which registrations you need at all.
Book the 20-minute call before you form anything. Unwinding a wrong structure costs multiples of choosing the right one.
Frequently asked questions
At what profit level does a limited company make sense?
There is no universal figure — the crossover moves with tax rates and depends heavily on whether profits are retained in the company or drawn out. The honest rule: if you spend everything you earn, the tax case for a company is thin; if you retain profits or carry real liability risk, run the comparison properly.
Does a limited company protect my personal assets?
For the company's debts, broadly yes — that is what limited liability means. But banks and landlords often require personal guarantees, and directors remain personally exposed for wrongful trading and unpaid PAYE/VAT in misconduct cases. It is real protection with real edges.
Can I be employed and run a business at the same time?
Yes, both structures coexist with employment. Your employment tax position continues under PAYE; the business side is reported separately. Check your employment contract for restrictions — that constraint is contractual, not tax.
What about a partnership with my spouse?
Partnerships (and companies with spouse shareholders) can share income across two sets of allowances and bands legitimately — where the arrangement is real: genuine ownership, genuine involvement or capital. Structures that exist only on paper attract exactly the attention you would expect.