Sole trader or limited company? How to start a business in the UK, step by step

You have an idea, a skill or a first customer. Before you send the first invoice, you need to decide how the business will be set up. For most people in the UK, the choice is between being a sole trader and running a limited company. Partnerships exist too, but they are less common for one-person businesses.

This guide is general information. An accountant can look at your own numbers.

Option 1: sole trader

A sole trader is the simplest way to work for yourself. You and the business are the same thing in law. You keep all the profit after tax, and you are personally responsible for any debts.

Setting up: there is no fee and no paperwork with Companies House. You tell HMRC you are self-employed by registering for Self Assessment.

The deadline that catches people out: you must register if you earn more than £1,000 from self-employment in a tax year (6 April to 5 April). You have to tell HMRC by 5 October after the end of the tax year in which you started. For example, if you started trading in the 2025 to 2026 tax year, the deadline was 5 October 2026. You can register earlier, and it is a good idea to.

Records: from the day you start trading you must keep records of your income and expenses, so you can work out your profit.

Making Tax Digital: if your income from self-employment and property, before expenses, goes over £30,000 in the 2025 to 2026 tax year, you will need to use Making Tax Digital for Income Tax from 6 April 2027. The threshold falls to £20,000 a year later.

Good for: getting started quickly, testing an idea, trades and services where you work alone and the risk is low.

Option 2: limited company

A limited company is a separate legal 'person'. It owns the business, signs contracts and pays its own corporation tax. You are usually a director and a shareholder. Your personal liability is normally limited to what you invested in the company.

Setting up: you register the company with Companies House. Online it costs £100 and is usually done within 24 hours. By post (form IN01) it costs £124 and takes 8 to 10 days.

To register you need:

• a company name, usually ending in 'Limited' or 'Ltd', that is not the same as or too like an existing one;
• a registered office address in the UK (not a PO Box) and an email address;
• at least one director, aged 16 or over;
• at least one shareholder, who can be you;
• a SIC code describing what the company does.

Directors must also verify their identity with Companies House through GOV.UK One Login. Each director gets a personal code that is used when the company is registered.

Ongoing work: a company files annual accounts and a confirmation statement with Companies House, and a company tax return with HMRC. Most owners use an accountant. Information about the company and its directors is public on the register.

Good for: businesses with more risk, bigger contracts, clients who only work with companies, or plans to take on investors or staff.

How to choose: five questions

1. What could go wrong? If a mistake could lead to a big claim or debt, the protection of a limited company matters more. Insurance matters either way.
2. Who are your customers? Some larger clients prefer or require a limited company.
3. How much admin will you do? A sole trader can often manage with simple bookkeeping. A company needs more formal accounts.
4. How much do you expect to earn? The tax position changes with profit levels. This is where an accountant earns their fee.
5. Do you want privacy? A company's details and its directors' names are published on the Companies House register.

You can start as a sole trader and form a company later. Many people do exactly that once the business has proved itself.

Your first-week checklist

1. Choose a name and check it is not already taken by a company or trade mark.
2. Register with HMRC (sole trader) or Companies House (limited company).
3. Open a separate bank account for the business.
4. Set up a simple way to record every sale and every cost from day one.
5. Check whether you need insurance, licences or permits for your trade.
6. Put your first prices and payment terms in writing.

Need money to start?

The government-backed Start Up Loan lends £500 to £25,000 at a fixed 7.5% a year to people whose UK business has been trading for less than five years, with up to 12 months of free mentoring. It is a personal loan, so think carefully before borrowing.

Starting small is normal. The setup you choose today can change as the business grows.