A sole trader and their business are the same legal person, so you are personally responsible for every business debt without limit. A limited company is a separate legal entity that owns its own assets and owes its own debts, and a shareholder’s liability is normally limited to the amount unpaid on their shares.
That separation is the headline difference, but it is not absolute. Directors can still become personally exposed — most commonly by signing a personal guarantee, but also through an overdrawn director’s loan account or, in insolvency, through wrongful or fraudulent trading claims. Limited liability is a starting position, not a shield against everything.
The structures also differ in reporting and tax. A company files accounts and a confirmation statement at Companies House, and its details sit on a public register; a sole trader’s affairs stay private and are reported through Self Assessment. A company pays corporation tax and its directors carry statutory duties, while a sole trader’s profits are taxed as personal income. Which works out better depends entirely on your circumstances, and rates and thresholds change, so take that question to your accountant and check gov.uk rather than a remembered figure.
For borrowing, the practical differences are these:
- Sole trader agreements are usually assessed against you personally, so your personal credit file carries more weight.
- Company agreements are assessed against the company, but many lenders still ask directors for a personal guarantee, particularly where the company is young or the deal is larger.
- Sole traders and partnerships are individuals in law, so some agreements with them can fall inside the FCA consumer credit regime depending on the amount and the purpose. Broadly, business-purpose lending above £25,000 to an individual sits outside that regime and smaller amounts may not — but check the current position with the lender rather than relying on a remembered figure, because it changes the documentation and the rights that come with the agreement.
We are a credit broker, not an accountant, so choose your structure on accountancy and legal advice. Once it is settled we can tell you how it is likely to be viewed by funders. Our sole trader asset finance page covers the unincorporated route in more detail.