Making the leap from Sole Trader to Limited Company can feel like a big decision, but it doesn’t have to be overwhelming.
Whether you’re just starting out or your business is growing fast, this guide will help you understand the differences, weigh up the pros and cons, and know when (and how) to make the switch smoothly.
Why Consider Changing from Sole Trader to Limited Company?
Operating as a sole trader is straightforward, flexible, and a popular choice for new businesses. You get to keep things simple: fewer forms, less red tape, and all the profits belong to you (after tax, of course).
But as your business grows, becoming a limited company might make more sense, especially from a tax and protection point of view. It doesn’t suit everyone, but for many, it opens up new opportunities.
Let’s explore when that tipping point might be.
1. When Does It Make Sense to Incorporate?
There’s no set income level that demands you incorporate, but generally, if your profits reach around £30,000–£40,000 per year, it’s worth considering. At this point, the tax savings alone could make the transition worthwhile.
Also consider:
- Hiring staff or contractors?
- Looking to expand or attract funding?
- Want to protect your personal assets?
If you’ve ticked yes to any of those, a limited company might be the next logical step.
2. Pros and Cons of Limited Company Status
Here’s how the two structures compare:
✔️ Benefits of a Limited Company
- Tax-efficient options: Directors can take a mix of salary and dividends, which can reduce overall tax liability.
- Limited liability: Your personal assets (like your home or savings) are protected if something goes wrong.
- More professional image: A limited company often appears more established to clients and suppliers.
- Funding and growth: It’s easier to take on shareholders or sell the business later down the line.
- Continuity: The business isn’t tied to you personally—useful for succession planning.
⚖️ Points to Keep in Mind
- There’s more admin and paperwork, including annual accounts and regular filings.
- Information becomes public: Your company’s details (like directors and finances) are available via Companies House.
- You’ll have to run payroll if you pay yourself a salary, and potentially register for VAT (more on that below).
Still, with the right support, these aren’t barriers—just things to plan for.
3. What Does Running a Limited Company Involve?
Setting up and running a limited company is surprisingly affordable, and many of the extra responsibilities can be outsourced. Here’s what to expect:
- Incorporation costs just £50 if you register online with Companies House.
- You’ll need to submit a confirmation statement once a year (£34 filing fee), and have a registered office address (around £40/year if using a service).
- Accounting and compliance are more involved, but manageable. Most directors hire an accountant to take care of:
- Annual accounts
- Corporation Tax
- Payroll and pensions
- VAT returns, if applicable
Many accountants offer fixed monthly plans, so you can budget ahead and stay compliant without surprises.
4. What About VAT?
If your taxable turnover goes over £90,000 in a rolling 12 months, you must register for VAT (this threshold increased in April 2024). But even before you reach that, voluntary VAT registration can have benefits—especially if you sell to other VAT-registered businesses.
When registering, you’ll choose from schemes that best suit your setup:
- Standard Scheme – VAT is accounted for on invoices (even before payment).
- Cash Accounting – You only pay VAT once you’ve been paid. Great for cash flow.
- Flat Rate Scheme – Designed for smaller businesses; you apply a flat percentage to your turnover, simplifying reporting.
Registration is done through HMRC’s website and usually takes around 10 days. Picking the right scheme can save both time and money, so it’s always worth chatting it through with an expert.
5. How to Make the Switch in 6 Steps
If you’ve decided to move forward, here’s a quick overview of what’s involved:
- Register your company with Companies House.
- Inform HMRC that you’re stopping sole trader trading.
- Transfer business assets (like tools or stock) into the new company.
- Open a business bank account in the company’s name.
- Register for Corporation Tax, PAYE (if needed), and VAT.
- Let your clients, suppliers, and insurer know about the change.
A good accountant can guide you through each step to avoid disruption.
Final Thoughts: Choosing What’s Right for You
Both sole trader and limited company setups have their place. If you’re just starting out and want to test the waters with minimal admin, staying as a sole trader might be best for now.
But if your business is growing, you’re paying a lot in tax, or you’re thinking long-term, forming a limited company could give you more flexibility, protection, and savings.
At Blue Spire, we help local business owners weigh up their options with tailored advice—and take the hassle out of transitioning when the time comes. Whether you’re scaling up or staying solo, we’re here to make the numbers work for you.
| For personalised guidance and to explore how Blue Spire can support you in transitioning from sole trader to limited company, get in touch with our friendly team today. |
