Set up a business
Most businesses register as a sole trader or limited company, but there are other ways to set up a business.
The business structure you choose can affect the way you pay tax and your legal responsibilities.
You can move from one business structure to another. It’s usually easier to move from being a sole trader to a limited company.
Sole traders
A sole trader is the simplest business structure to set up and keep records for.
Sole traders make all the business decisions and keep all the profits after paying tax.
You can find out more about setting up as a sole trader.
Limited companies
A limited company is legally separate from the people who own it, and is run by one or more directors. There are a number of responsibilities and things to consider when running a limited company.
You can find out more about setting up a limited company.
Compare the differences between a sole trader and a limited company
This table shows the main differences between being a sole trader and a limited company.
| Sole trader | Limited company | |
|---|---|---|
| Legal risks or ‘liability’ | You are personally responsible for all of the debts of the business. This is called ‘unlimited liability’. If something goes wrong, you may need additional business insurance. | Company owners are responsible for the debts of the business only up to the value of their financial investment. This is called ‘limited liability’. A limited company may give you protection if things go wrong, but you may need additional business insurance. |
| Finances | You keep all the profits after paying tax. | Directors need to follow rules when taking money out of a limited company. |
| Name | You can choose a trading name or use your own name. | There are rules to follow when choosing a name for a business. |
| Keeping records and accounts | When you start trading you must keep records. | Directors need to follow the rules when running a limited company and must file accounts and tax returns for the company. |
| Registering | You can start trading straight away without registering. However, you must register for Self Assessment as a sole trader if you earn more than £1,000 in a tax year (from 6 April to 5 April). You can choose to register earlier. | Company owners need to register the company before they start trading. You can register earlier if you want to leave your company dormant. |
| Income Tax | You may need to pay Income Tax on your profits. You pay this through your Self Assessment tax returns. | Directors may need to pay Income Tax depending on how they take money out of a limited company. |
| National Insurance | You may need to pay National Insurance contributions depending on your profits. You can choose to pay these to qualify for certain benefits and the State Pension. | Directors may need to pay National Insurance contributions depending on how they take money out of a limited company. |
| VAT | You need to register for VAT if you meet the requirements. | The company needs to register for VAT if it meets the requirements. |
| Corporation Tax | Sole traders do not pay Corporation Tax. | The company will need to pay Corporation Tax on any profits. |
| Tax relief | There are tax reliefs for sole traders. | There are tax reliefs for limited companies. |
| Employment status | You will be classed as ‘self-employed’. | Company directors may be employees of the company or office holders. |
| Taking on employees | You can have employees. | The company can have employees. |
Other ways to set up a business
Check if you should set up as one of the following instead: