One of the first decisions every new founder faces is deceptively simple-sounding: should I trade as a sole trader or set up a limited company? It's a question with significant financial and legal consequences, and the right answer depends on factors most generic articles don't account for.
The fundamental difference
A sole trader is you. Legally, there is no separation between you and your business — your business's debts are your debts, your business's income is your income. A limited company is a separate legal entity. It can own assets, enter contracts, and incur debts in its own name. You are a shareholder and, usually, a director.
This distinction matters for tax, for liability, and for how third parties perceive you.
The tax picture
As a sole trader, all profit is subject to Income Tax and Class 4 National Insurance Contributions in the year it's earned — regardless of whether you actually draw it. In the 2025/26 tax year, that means rates of 20%, 40%, or 45% on income above the relevant thresholds, plus 6% NIC on profits between £12,570 and £50,270.
As a limited company, the company pays Corporation Tax on its profits (currently 19% for profits up to £50,000, rising to 25% for profits above £250,000, with marginal relief in between). You then extract money from the company — typically through a combination of salary (which is a deductible expense) and dividends (which are taxed at lower rates than income). With careful structuring, the combined tax rate on money you extract can be materially lower than the sole trader equivalent.
"The tax saving from incorporating isn't automatic — it depends on how much profit you're generating and how much of it you actually need to take out. That calculation is worth doing properly before you decide."
At what profit level does a limited company make sense?
There's no universal threshold, but as a rough guide: once your business is generating profits above around £30,000–£40,000 per year, the tax efficiency of a limited company structure starts to outweigh the additional compliance costs (company accounts, confirmation statement, more complex tax returns). Above £50,000–£60,000, the saving is usually significant.
Below those levels, the additional admin burden of a limited company — annual accounts filed at Companies House, corporation tax returns, directors' duties — may outweigh the benefit.
Liability protection
A limited company limits your personal liability for business debts. If the business fails, creditors can generally only pursue the company's assets — not yours personally (subject to exceptions, including personal guarantees, which you should understand before signing).
As a sole trader, there is no such protection. If a client sues you, or a supplier is unpaid, your personal assets — savings, property — are at risk.
What about credibility?
In some sectors and with some clients, trading as a limited company is simply expected. Larger businesses, public sector contracts, and many professional services engagements require it. If you're targeting those markets, the question may be resolved for you.
The IR35 consideration
If you're a contractor or consultant working primarily with one client, the IR35 rules are critical. HMRC's off-payroll working rules (IR35) can deem you to be an employee for tax purposes even if you operate through a limited company — stripping out most of the tax advantage. This needs specific advice based on your working arrangements.
The right answer for you
The honest answer is that there isn't one answer. It depends on your profit level, your sector, your risk profile, your personal tax position, and your plans for the business. What we'd caution against is making the decision based on what your friend did, or what felt easiest at the time.
If you're at the point of making this decision — or wondering whether you made the wrong one — book a free call with a Runway founder. We'll model both options for your specific situation and tell you exactly which structure makes more sense.