Most people start a dropshipping shop as a sole trader, because there is nothing to set up. Some start a limited company instead, or move to one as the shop grows. The biggest difference is who is responsible for the business's debts, and how much paperwork comes with it.
This guide sets out the difference, what a limited company costs to set up and what it has to do each year.
The big difference: who owes the money
As a sole trader, you and the business are the same. gov.uk says you are personally responsible for all of the business's debts, which is called unlimited liability.
A limited company is separate from the people who own it. Its owners are only responsible for its debts up to the money they have put into it. Its money has to be kept separate from your own, in its own bank account.
Setting up a limited company
You register a limited company with Companies House. It costs £100 online, and the company is usually registered within 24 hours, or £124 by post. One person can own the whole company and be its only director, as long as they are 16 or over.
The company needs a registered office address, which is public, so think twice before using your home. Since 18 November 2025, every director has to verify their identity with Companies House, which you can do online with photo ID.
What it has to do every year
- A confirmation statement to Companies House at least once every twelve months, which costs £50 online. Not filing can mean a fine of up to £5,000.
- Annual accounts to Companies House, nine months after the end of its financial year. The first accounts are due 21 months after it was registered.
- A Company Tax Return to HMRC, even if it made a loss, and Corporation Tax paid nine months and a day after the end of its accounting period.
- Records kept for six years from the end of the financial year they relate to.
The law says a new company must tell HMRC it is liable for Corporation Tax within three months of starting to do business.
How a limited company is taxed
A limited company pays Corporation Tax on its profits. On profits of £50,000 or less it is 19%, and on profits over £250,000 it is 25%, with a tapered rate in between. You then pay yourself from the company, which has its own tax rules. A sole trader pays Income Tax on their profits through Self Assessment instead.
Being a director
A director has seven legal duties under the Companies Act, including acting in the company's interests and taking reasonable care. Even if you pay an accountant, you are still legally responsible for the company's records and accounts. A director who doesn't meet these duties can be fined, prosecuted or disqualified.
What it changes on your website
A limited company must show its registered number, its registered office address, where it is registered and that it is a limited company on its website. Our guide to what your website must tell customers covers the rest.
Which to choose
A sole trader has less to set up and less to file, which suits a shop that is just starting. A limited company keeps the business's debts separate from your own and pays tax differently, but comes with more paperwork every year. gov.uk has a page comparing the two side by side, and an accountant can tell you which works out better for your own circumstances.
