Sole trader or limited company for an online shop?

Should your online shop be a sole trader or a limited company? Most new UK shops start as sole traders because it’s free, quick and simple. A limited company makes more sense once profits are higher, or if you want to keep business risks separate from your personal money.

Neither is right for everyone. This guide sets out the differences in plain English, using rules as of October 2026. It isn’t legal or tax advice: talk to an accountant about your own numbers before you decide.

The quick difference

Sole trader

You and the business are the same in law. Profits are your income, and you’re personally responsible for any business debts.

Limited company

A separate legal body that you own (as shareholder) and run (as director). The company owns the shop, earns the profit and is responsible for its own debts.

Setting up

As a sole trader, you tell HMRC you’re self-employed and register for Self Assessment. As of October 2026 you need to do this if your trading income goes over the £1,000 trading allowance in a tax year, by 5 October after that tax year ends. It’s free.

As a limited company, you register with Companies House. As of October 2026:

• Registering online costs £100 (the fee went up in February 2026).
• Every director, and anyone with significant control, must verify their identity with Companies House.
• You then register for Corporation Tax within three months of starting to trade.

Tax: sole trader or limited company for an online shop

This is usually the biggest question, and the honest answer is: it depends on your profit.

Sole traders pay Income Tax and National Insurance on their profits through Self Assessment, at the same rates as other personal income.

Limited companies pay Corporation Tax on profits. As of October 2026 the rate is 19% on profits up to £50,000 and 25% above £250,000, with a sliding rate in between. To get money out, you usually pay yourself a salary, dividends or both, and those are taxed again personally.

• At low profits, the extra costs and admin of a company often wipe out any tax saving.
• At higher profits, a company can be more tax-efficient, especially if you leave some profit in the business to grow it.
• Tax rates and allowances change often. Dividend tax, for example, has changed more than once in recent years.

Personal risk

As a sole trader, if the shop owes money (to a supplier, a landlord or a customer who sues), you’re personally liable. Your savings and possessions could be at risk.

With a limited company, the company is liable, not you. That protection has limits, though:

• Banks and landlords often ask directors to sign a personal guarantee.
• Directors have legal duties and can be held responsible for wrongdoing.
• Insurance (public and product liability) protects you in many cases whichever structure you choose.

If you sell products that could cause injury or damage, such as electricals, cosmetics or children’s items, limited liability and good insurance both matter more.

Paperwork and running costs

Sole trader admin is light: keep records of sales and costs and file one Self Assessment return a year.

Making Tax Digital for Income Tax is changing this. As of October 2026, sole traders with qualifying income over £50,000 must keep digital records and send quarterly updates from April 2026. The threshold drops to £30,000 from April 2027 and £20,000 from April 2028. Qualifying income means turnover, not profit.

Limited company admin is heavier:

• Annual accounts filed with Companies House and HMRC.
• A Corporation Tax return every year.
• A confirmation statement each year (£50 when filed online, as of October 2026).
• Payroll if you pay yourself a salary, and records of dividends.
• Most company owners pay an accountant, which is a real yearly cost to factor in.

Privacy

Company details are public. Your name, the month and year of your birth and a correspondence address appear on the Companies House register. You can use a service address rather than your home.

Sole traders don’t appear on a public register, but you still need to show a business name and contact address on your website.

Your website and paperwork

A limited company must show its full registered name, company number, where it’s registered and its registered office address on its website and emails. Sole traders trading under a business name should show their own name and an address too.

Check the latest rules on gov.uk when you set up your shop’s legal pages.

Things that are the same either way

• The VAT registration threshold (£90,000 of taxable turnover in a rolling 12 months, as of October 2026).
• Consumer law: returns, refunds and product safety.
• Licences or registrations for products like food, alcohol or cosmetics.
• The ICO data protection fee, if it applies to you.

Signs it might be time to go limited

• Your profits are growing and your accountant says the numbers now favour a company.
• You’re signing bigger contracts, leases or supplier deals and want to limit personal risk.
• You plan to bring in a business partner or investor.
• Suppliers or trade customers prefer dealing with a company.

In short

For most people starting a small online shop, sole trader is the simplest, cheapest start. A limited company brings protection and can save tax at higher profits, but costs more to run and needs more paperwork. Rules here are correct as of October 2026, but this isn’t legal or tax advice: check gov.uk and speak to an accountant before you decide.