| Factor | Sole trader | Partnership | LLP | Limited company |
|---|---|---|---|---|
| Liability | Unlimited personal liability | Unlimited joint liability | Limited liability | Limited liability |
| Tax on profits | Income tax + Class 4 NI (up to 45%) | Income tax + Class 4 NI per partner | Income tax + NI per member | Corporation tax (19% or 25%), then dividend tax |
| Setup cost | Free (register with HMRC only) | Free to low | £40 online (Companies House) | £50 online (Companies House) |
| Annual compliance | Self Assessment only | Self Assessment per partner | Accounts + confirmation statement | Accounts + CT600 + confirmation statement |
| Privacy | High (nothing public) | High | Accounts publicly filed | Accounts publicly filed |
| Can take investment? | Difficult | Difficult | Possible | Yes, via shares |
| NI treatment | Class 4 on profits above £12,570 | Class 4 per partner | Class 4 per member | Employer + employee NI on salary only |
| Pension access | Personal pension contributions | Personal pension contributions | Personal pension contributions | Company pension contributions (more tax-efficient) |
| Making Tax Digital | MTD ITSA from April 2026 (if income over £50k) | MTD ITSA from April 2026 per partner | MTD ITSA per member | MTD for VAT; CT not yet MTD |
Answer these questions to get a recommendation for your situation.
The limited company structure generally becomes tax-efficient once your profit exceeds around £30,000 to £40,000 per year, though this varies with the April 2025 employer NI changes. Below that level, the tax saving is often smaller than the additional accountancy and admin costs. Use the Sole Trader vs Ltd calculator to find your exact breakeven point.
Frequently asked questions
As a sole trader you and the business are legally the same entity, meaning you are personally liable for all business debts. A limited company is a separate legal entity and your personal liability is limited to any unpaid share capital. This difference in liability protection is often the primary reason business owners incorporate.
Incorporation typically becomes tax-efficient at profits above roughly £30,000 to £35,000 per year, though the exact crossover depends on your circumstances. Above this level the combination of a small salary and dividends from a limited company usually results in a lower overall tax bill than sole trader income tax and Class 4 NI. Our Sole Trader vs Ltd calculator shows the precise breakeven for your situation.
A Limited Liability Partnership combines the pass-through taxation of a partnership with the limited liability protection of a company. LLPs are commonly used by professional services firms such as solicitors, accountants, and architects where multiple partners want to share ownership without the formality of a limited company structure.
Companies House typically processes online incorporation applications within 24 hours, and often within a few hours. The cost is £50 for standard online incorporation. You will need to provide details of directors, shareholders, the registered office address, and your share structure.
Yes. Many business owners start as sole traders and incorporate later when turnover and profits justify it. The process involves registering the new company, transferring any contracts, assets, and intellectual property, registering for PAYE and potentially VAT under the new entity, and notifying HMRC that you have ceased trading as a sole trader.