The Switch: Sole Trader to Ltd. Company
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The Switch: Sole Trader to Ltd. Company

In the UK, almost 60 per cent of businesses operate as sole traders, and it’s easy to see why. The set-up process is free and straightforward, helping lots of self-employed people start their business journey seamlessly.

However, as your business grows, the time may come when it’s no longer the best decision, both financially and commercially, to remain a sole trader. For many in this situation, becoming a limited company is the next step.

In this blog, we hear from Joanne Harris, Technical Commercial manager at SJD Accountancy, which is an accountancy firm that specialises in working for self-employed people, with her advice and insight on why sole traders may choose to go limited.

What is a limited company set-up?

As your business begins to take on more employees, sales and any business loans, your personal liability as the owner of the business increases,” Joanne explained.

A limited company is a business where, as the name suggests, the liability of its owners is limitedshould anything go wrong, because the company is a distinct legal entity, separate from its directors and shareholders.

For example, if a limited company owed money that it could not pay, the owner(s) liability would be limited to the assets within the company only. A sole trader has no such protections.

Due to this risk, many sole traders make the change to a limited company to protect themselves and their personal assets. However, the prospect of an established business and greater opportunities for tax planning also gives sole traders good reason to move to limited.

Joanne added: It’s a step typically for those who wish to grow their business and commit to it for the long-term, typically at least two years. There are also additional responsibilities and increased reporting requirements.


You’ll pay corporation tax, rather than income tax on your profits – 19 per cent of any profits made in a financial year – and may need to register for VAT depending on your turnover. You may also have PAYE income tax on your salary, if it is over the threshold of £12,500 per annum and national insurance contributions, both employers and employees also apply to your salaried income. Any dividends paid out of company profits after corporation tax will be reported on your self-assessment tax return and taxed at 7.5% at the basic rate and 32.5% at the higher rate. There is no National Insurance to pay on dividends.

A major positive for the limited company set-up is that you have more opportunities for tax planning, while also keeping your personal assets protected.

Making the change from sole trader to limited company

Incorporating a limited company is a more complicated process than registering as a sole trader butcan easily be done by following these simple steps:

Choose a name for your limited company

“The name of your company must be unique, as long as no other limited company is using it, you may be able to keep the original name you had as a sole trader. It will also protect the name, as no one will be able to use it once you have registered.

Register with Companies House – this is the most important step, as it’s a legal requirement for all limited companies

This can be done online, and you’ll need to provide some basic information including director names, relevant addresses as well as a memorandum and articles of association – these are legal documents to state you’ve agreed to form the company and follow the rules that come with running a limited company. Most incorporated companies use standard ones provided by Companies House.

Register your business for Corporation tax, VAT and PAYE with HMRC. You should also consider adding your accountant as an authorised agent, this will allow them to contact HMRC on your behalf.

You’ll need to complete a form confirming you’re ceasing running the business as a sole trader. You will still need to submit your self-assessment tax return including your trading profits as a sole traderby the end of the tax year. As a director of a limited company, you will still need to submit a self-assessment tax return each year and pay tax on dividends paid.


Speak to your insurer. You may have insurances in place as a sole trader, these will need to be cancelled and a new policy taken out in the name of your limited company.

Which insurances you need to take out and the level of cover will depend upon the needs of your business. Most limited companies will as a minimum take out Professional Indemnity, Public Liability and Employers Liability.

Company assets

Transfer your business assets to the limited company

If your sole trader business owns assets, for example the products you sell, equipment or property, it can be transferred to the limited company at fair value. This is usually done by selling the assets to the newly incorporated business at market value. There may be tax considerations and generally speaking the assets held by your limited company must be held ‘wholly, exclusively and necessarily for the purposes of trade’. You should seek the advice of an accountant on transferring assets, particularly vehicles.

It’s also important to inform all your clients of the change and set up a business bank account in your new company name.

Running a limited company

Once your registration on Companies House is confirmed, you’ll officially be trading as a limited company, and along with limited liability and increased opportunities for tax planning, you could benefit from:

A more professional image – going limited demonstrates you are here to stay and raises your profile, which some suppliers may favour
Funding – business funding can be difficult to secure, but limited companies may find the process smoother
A pension plan – as a limited company, you’ll be able to make contributions into your pension scheme as an employer. Reasonable contributions into the pension plan of a director or employee will be regarded as a legitimate business expense and qualify for corporation tax relief

This will include more business administration than a sole trader would deal with, and this can prove time consuming. As a next step, hiring an accountant to carry out these tasks could help.

However, as long as you keep your books in order, establishing limited company status provides solid ground to grow your business further, while keeping your tax affairs straightforward.

If you’re a growing limited company eyeing expansion in 2021 or a sole trader thinking about making the step up, a Capify business loan could help with investment in new stock, hiring employees or managing cash flow after the festive period. Get in touch today to check if you’re eligible.