Step #11 of my Top 20 Tips for Small Business Start Ups is where I’ll explain terms like "sole trader" and "limited company" and you may feel like nodding along while quietly having no idea what the difference is. Don't worry, it’s not that heavy.
Your business structure is the legal form your business takes. It affects how you pay tax, what happens if things go wrong, how much paperwork you'll have, how much it costs to be in business and how customers see you. The good news is that you can change your business structure later on and just set up as a sole trader from day one.
Here's the plain-English guide. (I'm a marketer and small business owner but not an accountant or solicitor, so use this to get your head around the basics, then decide if you need to get proper advice for your particular situation.)
The two most common business structure options
According to GOV.UK's guide to setting up a business, most businesses register as either a sole trader or a limited company, though there are other options. Here's how the two most common compare:
Sole trader
What is it? You and the business are the same entity in law
If things go wrong. You're personally responsible for all the debts of the business ('unlimited liability')
Setting up. You can start trading straight away, but must register for Self Assessment if you earn over £1,000 in a tax year
Tax. You pay Income Tax (and possibly National Insurance) on your profits through Self Assessment
Taking money out. You keep all profits after tax
Paperwork. You must keep records of income and expenses
Name. Your own name or a trading name
Limited Company
What is it? The company is legally separate from the people who own it, and is run by one or more directors (which will be you)
If things go wrong. Owners are only responsible for the debts up to the value of their investment ('limited liability')
Setting up. You must register the company before you start trading
Tax. The company pays Corporation Tax on its profits, and directors may pay Income Tax depending on how they take money out
Taking money out. Directors must follow rules on taking money out, such as salary, dividends or a directors' loan
Paperwork. The company must file accounts and tax returns, and directors must follow company rules
Name. There are rules for choosing a company name
That's based on GOV.UK's comparison table, which is worth reading in full: set up a business.
The other options
There are other structures to know about too:
• Business partnership. Two or more people running a business together. There's a separate process, explained on GOV.UK's partnership page. If you're going into business with someone, get a written agreement from the start.
• Social enterprise. If your main aim is social or environmental good, see GOV.UK's guide to setting up a social enterprise.
What do most people choose?
The latest figures from the Office for National Statistics are interesting. Of the 2.79 million VAT and/or PAYE registered businesses in the UK in March 2026, about 2.16 million were companies (77.3%), around 378,000 were sole traders and around 156,000 were partnerships. And 43% of those companies had a single employee, so plenty of one-person businesses choose to be limited.
A word of caution: these figures only cover businesses registered for VAT and/or PAYE, so they're skewed towards larger, more established businesses than a brand-new start-up. They show what's common, not what's right for you. A new small business will normally be fine as a sole trader.
Questions to ask yourself
1. How risky is my business? If something went wrong (a customer claim, a big debt), could it hurt me personally? Limited liability can offer protection, though you may still need insurance. We'll look at that in Step #19.
2. How much will I earn? Tax works differently under each structure, and the better option can change as your profits grow. This is exactly where an accountant earns their fee.
3. How much admin am I happy with? Sole trader is the simplest to set up and keep records for. A limited company comes with more responsibilities.
4. How do I want to look? Some customers, especially bigger organisations, may prefer dealing with a limited company. You may look more credible. Others won't care and will prefer the small guy.
5. Do I want privacy? Companies House makes company information available to the public, which isn't the case for a sole trader.
6. Will I need funding, partners or investors? Some lenders and investors prefer a limited company, and if you want to bring in a business partner or give someone shares, a company can be easier to structure.
7. Where do I want this to go? If you're planning to grow quickly or take on staff, think about whether your structure will cope.
Don't let it paralyse you
I've met people who put off launching because they couldn't decide on a structure. Remember that starting as a sole trader and changing later is perfectly normal, and many people do exactly that. Equally, if you know from the start that you'll need limited liability, set up a company from day one. What matters is that you make a considered choice.
Get some proper advice
This is one area where an hour with a professional can be worthwhile if you’re floundering with a decision. The ICAEW's Business Advice Service offers a free initial consultation with a regulated accountant, with no obligation. You can also find free local advice via the Business Support Service and growth hubs.
So what to do next?
Remember, it doesn’t have to be today, but you should:-
• ☐ Read GOV.UK's sole trader vs limited company comparison
• ☐ Answer the seven questions above for your business
• ☐ Write a list of questions for an accountant
• ☐ Book a free initial consultation
• ☐ Make a provisional decision, and note when you'll review it
Need a sounding board?
I can't advise on tax, but I'm happy to talk through how your structure fits your wider plans. Book a call with me here.
Next up in the series: Step 12, Track Cash Flow. The thing that catches out more start-ups than almost anything else.
