Changing from sole trader to limited company

Your business should be your most important priority. You must take part in small things that will benefit the business. Businesses must note that it is not entirely about statistics, and the numbers in your business will keep changing with time.

Becoming a sole trader is excellent, and so is a limited company. Each of these business structures has its benefits and cons. Comparatively, a limited company formation will bring you more benefits than others. If you have started as a sole trader, you can change into a limited company.

Before knowing why to switch from a sole trader business to a limited company, let’s check what both business models are.


Sole Trader vs Limited Company

Sole trader and limited company

What is a sole trader?

Sole traders and limited companies are some significant company structures across the UK. Most startups and small and medium-sized businesses consider opting for this structure. However, you must know there is a substantial difference between the two.

A sole trader is a business model wherein a single person owns and operates it. This person will control all the aspects of the business. Therefore, this person will compare the everyday decisions and keep the personal and funding responsibilities in check.

What is a limited company?

A limited company has shareholders. It is a prominent business model where more than one person is involved. Since it is about shareholders, the number of people can vary. While there can be a person who owns all the company shares, multiple people can be willing to invest in the company. Depending on their investments, they will get a specific percentage share.

All the limited company shareholders will have some role in the company. They will be responsible for taking care of the daily activities and contributing to the company’s management and running. However, not every shareholder will have the most critical roles to play. Some of these roles will be taken care of by the director only.


What are the benefits of changing from sole trader to limited company?

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Best accountants in Newport in South

There is no doubt that the sole trader business structure is extremely important and beneficial. However, after some time, you may want business growth.

Switching from sole trader to a limited company model can bring a wide range of benefits to the business. Some of the common reasons to make the switch include the following:

1. Full liability

One of the significant benefits of a limited company is that you will get a legal identity. Since the business has a legal identity, there will be a liability for the property to get into debt. All these financial liabilities will be imposed on the company, not the owner. When it is about a sole trader, all the debts will be registered under the owner’s name and not a business.

Full liability of the business can also offer complete security to the company. You don’t have to worry about your assets to cover any loan default. Moreover, when you want to buy or own a property, this liability can also help. It will protect you from stamp duty tax charges as none of the uncalled scenarios will affect the owner’s name.

2. Better professionalism

While sole traders are a great business model, there is a lack of professionalism. Comparatively, the limited company will help you establish a more positive reputation in the market. Since it will be an established company, it will help you get clarity and credibility in the market.

When you’re a sole trader, it will be pretty difficult for you to acquire a new client. However, when you reach out to a potential business prospect, the chance of securing them as a client increases. Therefore, it can bring more business, thereby boosting your profits. It will also allow the growth of business with an increased client base.

3. Better financial backing

Limited companies will likely have better financial backing than sole trader companies. Every limited company has its own identity. Since they are registered, it becomes easier for them to get loans and get business. It will also be easier for these companies to drive investments.

Your company comes off as a professional asset in front of the investors. Most investors are more likely to invest in a business than a person. As a sole trader, you can only apply for personal loans, and applying for a business loan can often be challenging for sole traders.

Moreover, one of the main reasons why they get better financial backing is because of the shares. As a limited company, you will have the flexibility to sell or even assign shares for the company. Every investor can get something significant from the company.

4. It is easy to sell the limited company

If you ever have plans to sell your business in the long run, you should consider switching to a limited company. Having a sole trader business will not bring you the flexibility of selling the business. Well, selling a profitable company can help you earn a lot of money.

Selling a limited company is a long-term goal that businesses may adopt. You can legally transfer the shares to the new owner when you sell the limited company. Moreover, if you want any family member to take over the business, you can quickly transfer the shares. Nonetheless, this must be done legally as per the law. Transfer of shares and selling the company becomes easier when you have a limited company than being a sole trader.

Accounts preparation

5. Tax benefits

Comparatively, limited companies will get better tax benefits than sole traders. The sole traders will have to take care of personal tax rates. However, limited companies will need to pay fewer taxes.

The limited companies can also claim numerous allowable expenses, which can help to reduce taxes. Some expenses that can be claimed include broadband and mobile charges, business insurance policies, fixed asset and equipment, accountancy fees, travel costs and more.

It can be claimed if any expense is made only for business purposes.


Switching from a sole trader to a limited company can be a big step. However, it will also mean that your business is ready for growth. When planning to change, you must weigh down the benefits of each business model. You must check with your accountant and then make a move.

Sole trader vs limited company FAQ

In the UK, limited companies are the most common type of company. It's a corporate entity which is considered separate to those who own and operate it. Fundamentally, this means that the company can possess assets or enter a contract in its own name, rather than that of the stakeholder.

You might be wondering what does the word 'Limited' in Limited Company mean? This refers to the limited liability afforded to shareholders. It means that shareholders are only responsible for the company's debts, to the value of their shares. Essentially, having limited status means that your company is —in its own right - an entity.

Your Limited Company is established once it has been incorporated. Incorporation also referred to as company formation, involves registering the company with the UK's registrar of companies: Companies House.

What does this mean? Above all, it means that you'll no longer take full responsibility for the company and its tax, national insurance, and other finances. Moreover, the company's finances will be completely independent of your own. In the same way, any profit made from the company is thus owned by the company after it pays its corporation tax. The profits can then be distributed among its members (those people or organisations who have shares in it).

It's important to note that a limited company provides you with added protection if things go awry with your business. Also, it might be easier for you to take our business loans and secure investment.

Because a limited company is a distinct entity from its owners, it may be a little easier for a company to secure business loans and investment. What's more, a limited company might benefit from tax advantages, too.

What happens to a limited company once you retire or resign? The company will continue to exist and operate, ensuring job security for employees.

So, what's the difference between limited and sole trader? It can be challenging to wrap your head around the differences. That being said, the main difference between sole trader vs limited company can be seen in the way that taxation and legal liabilities are applied.

As a sole trader, there's little legal distinction between you and your business. This means that your assets aren't protected. Moreover, all business debts come back to you. A limited company, on the other hand, is a legal entity on its own and therefore the liability shifts to the company. This means that there is less personal monetary risk involved with limited companies.

Setting up as either business structure has its advantages and disadvantages. Fundamentally, it all comes down to your business needs. However, there are some key factors that distinguish these two business structures which we can use to weigh them against each other.

Setting up as a sole trader is relatively simple. All you need to do is file a self-assessment tax return on your annual accounts. It does mean keeping track of all your business transactions and expenses, however, you can always hire an accountant to do that. Once you've filed those taxes you get to keep all of the profits earned from your business and claim the expenses, as opposed to dishing them out to various shareholders or employees. Choosing to go solo as a sole trader means you can maximise your salary and operate with minimal costs. Moreover, you can enjoy greater privacy than incorporated businesses. For more information read our sole trader advantages & disadvantages guide.

On the other hand, setting up as a limited company allows you to enjoy limited liability as there's a legal distinction between you and your business. So you'll only stand to lose that which you invest in the company. This structure is a good idea for small businesses who need greater legal rights to grow with shareholders and employees. For more information read our limited company advantages & disadvantages guide.

It's also a more tax-friendly way to operate, as the company must pay corporation tax on profits rather than income taxes, which are taxed at a higher rate. Moreover, once you've registered your small business company name no one else can use it. Adversely, sole traders aren't offered the same protection.

So, what's better: sole trader or a limited company? There's no definitive answer to this question, as it all depends on your business needs, plans for the future, and what works best for you. If you want to grow and expand your business and reduce liability, then operating as a limited company could well be worth your while and the most efficient way to handle and pay tax and national insurance finances.

If you're confused about whether you should be a sole trader or limited company, there are some things you'll need to consider before making the switch.

The first point to consider is your salary. How much are you earning? If your earnings are relatively low, then it's likely you'll also want to keep your accounting and tax as simple as possible. The sole trader structure is definitely easier to manage, as you'll just have to send a tax return at the end of the year. To do this you might consider hiring an accountant to help organize and track your accounts and expenses. Operating as a limited company usually incurs higher accountant fees than sole traders, but saves you from running around trying to track down all your accounts when the time comes!

As your small business as a sole trader grows, your profits are likely to grow too. Unfortunately, so will the amount of taxation you're required to pay. If your earnings increase, you may need to consider forming a limited company to pay corporation tax instead.

When making this decision it's important to weigh up your overall earnings with the taxation rates you'll need to pay as a limited company director. This will help you to understand whether the costs of running your business as a limited company are going to be worth your while, or if it'll affect the salary you'll take home at the end of the day.

If you're a small business owner and decide to switch from operating as a sole trader to a limited company structure, you'll find there are several advantages. Let's take a closer look at some of the best advantages of making the switch.

1. Limited liability

Changing to a limited company means you, as director, won't be personally liable for any debts your business might incur as the company is a separate entity. This gives you an added level of protection and ensures you won't find yourself caught between a rock and a hard place if things go awry. Your business success isn't always solely dependent on your efforts - there are a number of factors at play - so you must ensure you've got the protection you need just in case things don't go as planned.

With this in mind, as a limited company business owner, it's a good idea to keep separate bank accounts for your finances and your business's. A business bank account could help you to keep track of everything and avoid any taxation surprises.

2. It's more tax-efficient

Sole traders pay taxes on the business profits they make. However, this only happens when you earn more than £11,000 per year. Once your income is more than this as a one-person self-employed sole trader, you could find yourself paying high taxation rates if you earn over £150,000 per annum.

As a general rule of thumb, if you earn up to £30,000 per year you should start thinking about incorporating your business. If you own a growing small business and are wondering whether to switch to a limited company, it's a good idea to consider the amount your business makes.

By changing to a limited company setup, you'll find plenty of benefits when it comes to paying less in personal taxation amounts. You'll be liable for paying corporation instead of income tax on your profits, which is currently set at 18%.

3. Protect your business name

When you incorporate your business you'll need to register its legal name with Companies House. This means it's fully protected, providing insurance that no one else can operate under the same name. This allows you to grow and gain recognition as a business or brand. Moreover, it's a handy advantage if you want to secure a website name, create business cards, or have a logo designed.

4. Reach new levels of professionalism

What do you think of when you see a business name with "Ltd" at the end? That it must be professional, trustworthy, and reliable - right?

Transitioning to a limited company business structure could boost your business to new levels of professionalism and prestige that'll encourage potential clients and existing customers to take you seriously as a business, and —hopefully - invest in your products or services!

There are a few key disadvantages of being a sole trader. These include:

  • Sole traders have unlimited liability. If you run your business this way, the business owner is fully responsible for any debt incurred.
  • Raising finances can be more difficult as banks, insurance companies, and other investors prefer limited companies are they offer more security.
  • Taxation rates for sole traders aren't usually as kind as those for limited companies. Once you reach a certain amount of earnings, you'll have to pay more in taxation. As a company director, it might not be the best option if your business is growing.

If you are thinking of running a limited company keep in mind that it has its own drawbacks which include restrictions when coming up with a company name and having to pay Corporation tax from your taxable income.

Greater complexity

A limited company brings to the table extra paperwork with accounting and administration issues that are time consuming and complex as compared to the less administrative work done by sole traders.

More costs

Professional accounting required to keep books in order is time consuming and costly if there is a need to use an accountant.

Lack of Privacy

Apart from making available company documents on public record, related company owner information is also available for public scrutiny.

Lack of total control

Limited companies directors share equal power and control for decision making and finances.

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