Guides

Sole trader or limited company?

Naira Digital Growth · 18 October 2026

When you've got a craft and a customer, the business admin is usually the biggest hurdle — not the work itself. We went through all of this ourselves when we set up Naira Digital Growth, and nobody handed us a map. So here's ours, in plain English.

The first decision is what kind of business you are. It sounds big. It isn't, and for most people the answer takes three questions.

Could one mistake at work cost more than you own?

If you do building work, or anything that could injure someone or cause serious damage, a limited company protects your home and savings if the worst happens. You'll still want insurance. If the answer is no, keep going.

Will your customers or investors insist on a company?

Some large clients won't contract with a sole trader at all. Investors need shares to buy, and only a company has them. If neither applies to you yet, keep going.

Are you expecting a healthy profit in year one?

Well into five figures. A limited company can save tax at that level, but the saving comes with accounts, filings and an accountant's bill. Below it, the admin usually costs more than it saves. If you're not sure, ask an accountant before you form anything.

Answered no to all three? You're a sole trader

That's not the lesser option. It's the simplest one. You register for Self Assessment with HMRC, keep a record of what comes in and goes out, get public liability insurance, and you're trading. Most makers, trades and consultants start here. If the business grows into needing a company, you can form one later — it's a door that stays open.

The difference between a sole trader and a limited company, in plain English

Sole trader: you are the business. One tax return a year. No Companies House. You're personally liable, so insure the risk.

Limited company: a separate legal person. Your personal assets are mostly protected. Accounts, filings, usually an accountant. Worth it when the risk or the numbers say so.

If you're a sole trader: your first steps

1. Register for Self Assessment with HMRC by 5 October after the end of the tax year you started trading in. You'll get a Unique Taxpayer Reference (UTR).
2. Keep records from day one — money in, money out, receipts. A spreadsheet is fine to begin with.
3. Watch the Making Tax Digital thresholds. From April 2026, sole traders with qualifying income over £50,000 keep digital records and send quarterly updates; the threshold falls to £30,000 from April 2027.
4. Get public liability insurance. It isn't a legal requirement, but most customers expect it. If you take on staff, employer's liability insurance is required.
5. Consider a separate bank account. Not required for a sole trader, but it makes your records far easier.
6. Know the VAT threshold. Registration becomes compulsory when your taxable turnover passes £90,000 in a rolling 12 months.

Switching from sole trader to limited company later

Plenty of businesses start as sole traders and form a company once the risk or the profits grow. You register the company with Companies House, open a bank account in the company's name, move your contracts and equipment across, and tell HMRC you've stopped trading as a sole trader. An accountant can help you pick the right moment.

Quick questions

Do sole traders have limited liability? No. As a sole trader, you and the business are the same in law, so you're personally responsible for its debts. That's why insurance matters.

Can I be a sole trader and a limited company at the same time? Yes, as two separate businesses — for example, a sole trade alongside being a director of a company. Keep their money and records separate.

Do sole traders register with Companies House? No. Sole traders register with HMRC. Companies House is for limited companies.

Self employed or limited company — what's the difference? A sole trader is self-employed. If you run a limited company, you're usually its director and, for tax, often its employee too.

I have a job as well — do I still register? If you earn more than £1,000 a year from self-employment, generally yes (the £1,000 trading allowance).

Do I need an accountant as a sole trader? Not necessarily. Many start on their own and get one as things grow.

This is general information, not tax or legal advice. Check your own situation on gov.uk or with an accountant.

Next in the series

The first ten things to do, in order — coming soon.

The paperwork isn't our bread and butter — getting new Oxfordshire businesses found online is. Once you're set up, run our free website health check to see how your site measures up.