What is the difference between a sole trader and a company?

Looking to start a business but don't know what entity structure to implement? 

There are in fact 4 different types of entity structures you may choose to trade under (not including non profit organisations or clubs).

They are:

• Sole Trader
• Partnership
• Company
• Trust

Sole Trader

A sole trader is a business owned and run by an individual. There is no legal distinction between the owner and the business, meaning the owner is personally liable for all debts and obligations.

The benefits are simplicity and control: setup and running costs are low, the owner keeps all profits, and decision-making is entirely in their hands.

Sole traders pay income tax on profits via their personal tax return and are eligible for the Personal Allowance (currently £12,570 for 2024/25). Profits above this threshold are taxed at standard UK income tax rates: 20%, 40%, and 45%, depending on income, plus National Insurance contributions.

Partnership

A partnership is a business run by two or more people. Like a sole trader, a standard partnership is not a separate legal entity, so partners are jointly and personally liable for business debts.

Partnerships allow owners to pool skills and resources, and in some cases, there can be tax advantages, since profits are shared and taxed on each partner’s individual return.

While there is no legal requirement for a written partnership agreement, it is strongly recommended. An agreement should outline partners’ contributions, how profits are shared, and what happens if a partner leaves or the partnership dissolves.

Setup costs are generally low but slightly higher than a sole trader due to multiple owners. Each partner reports their share of profits on their Self Assessment tax return.

Company

A company is a separate legal entity, distinct from its owners (shareholders). Ownership is determined through the issuance of shares, and the most common type is a private company limited by shares (Ltd). Shareholders’ liability is generally limited to the amount unpaid on their shares, protecting personal assets beyond the investment in the company.

Companies are more complex and costly to set up and maintain. They must register with Companies House, maintain statutory records, and file annual accounts and confirmation statements.

Companies also pay corporation tax on profits (currently 25% for profits over £250,000, with a lower rate for smaller profits as of 2024/25). Because the company is taxed as a separate entity, shareholders are taxed again on dividends they receive.

One advantage of companies is that ownership can be transferred easily by selling or assigning shares, without affecting the company’s ongoing operations. This structure is ideal for raising capital, attracting investors, or planning succession.

Trust

A trust is a legal arrangement where a trustee holds property or assets for the benefit of beneficiaries, governed by a trust deed. A trust is not a separate legal entity in the UK, but it is treated as a taxable entity and must usually file a Trust Tax Return with HMRC.

Trustees can be individuals or a corporate trustee. Trusts are commonly used for family businesses, asset protection, and estate planning. Types include discretionary trusts, interest-in-possession trusts, and unit trusts, each with different rules and tax implications.

For discretionary (family) trusts, the trustee has flexibility in distributing income to beneficiaries. Beneficiaries then report their distributions on their personal tax returns, which can reduce the overall tax burden.

Trusts can be complex and costly to establish and manage, often requiring professional legal and tax advice.