This question is usually asked as a tax question and answered as a tax question, which is how people end up with a company they did not need and now cannot easily close.
The tax part
A sole trader pays income tax and Class 4 National Insurance on business profit, whether or not the money is taken out. A company pays corporation tax on its profit, and the director then pays tax personally only on what they extract as salary or dividends. Profit left in the company is not taxed again until it comes out.
The practical consequence is that incorporation tends to favour people who do not need to draw all their profit. If you take every penny out every year, the advantage narrows considerably — and at lower profit levels it can vanish entirely once you account for the extra costs.
The parts that are not tax
- Limited liability. A genuine protection, though lenders often ask directors of small companies for personal guarantees, which quietly removes much of it.
- Administration. A company means statutory accounts, a corporation tax return, a confirmation statement, a payroll scheme and formalities around taking money out. That is real cost and real time.
- Public disclosure. Your company's accounts and your details as a director appear on a public register. Sole traders have no equivalent exposure.
- Credibility. Some clients and sectors expect to contract with a company. Whether this matters is entirely sector-specific.
- Getting out. Closing a company properly is more involved than simply ceasing to trade as a sole trader.
It is not a permanent decision
You can incorporate an existing sole trade later, and there are reliefs designed for that transition. Starting as a sole trader while the business finds its level, and incorporating once profits justify it, is a perfectly sensible sequence — and usually cheaper than doing it the other way round.
The one thing that genuinely does not work is deciding by copying whatever the last person you spoke to did.
This article is general information, not advice. Tax treatment depends on your individual circumstances and the rules change. Please take advice specific to your situation before acting on anything here.