From sole trader to limited

Business owners may decide to set up as a sole trader or a limited company for various reasons.

I recently changed from sole trader to limited company. I started as a sole trader for personal reasons, but the situation changed and as the business grew, I knew the best option was to incorporate a limited company.


Firstly, let’s consider the definitions of each:


A Sole Trader is an individual who runs their own business and is considered self-employed. As a sole trader, you are personally liable for business debts, this means personal finance and assets are at risk.


A Private Limited Company is legally separate from its owner. The business owner is only liable for the amount of money they invest. The business owner has limited liability which helps protect their personal finances and assets.


The main difference between a sole trader and limited company is that a sole trader consists of one individual who is personally liable whereas a limited company is an entity in its own right and can have multiple owners who have limited liability.


Reasons why a business owner may choose to be a sole trader are:

  • Complete control over their business
  • Greater flexibility of running a business
  • Keep all profits after tax as theirs
  • Lower start-up costs (registering with HMRC is free)


Reasons why a business owner may decide to set up a limited company are:

  • Limited liability
  • Tax efficiency
  • Improved reputation
  • Funding opportunities
  • Securing trading name


So, if you are thinking of changing from sole trader to limited, where do you start?


When setting up a limited company, there are several things you need to consider. You should check your chosen name is available as there are stricter rules and requirements that apply to company names. You may also want to think about what address you will use as your registered address and service address


These are the main steps to consider:

  • You need to form your limited company (we can help with this )
  • Inform HMRC of the change to your business structure and de-register as self-employed.
  • Advise your accounting firm of the changes.
  • Transfer sole trader business to the company – depending on the nature of the business, you may need to transfer existing business assets to the new limited company. Always best to get professional advice as this may trigger capital gains tax.
  • Set up a business bank account – this is a legal requirement.
  • Register your limited company for Tax and PAYE.

You then will need to inform stakeholders about the change of business. Stakeholders are:

Employees/contractions, customers/clients, suppliers/service providers, banks/lenders/other finance providers, landlords and debtors.



Why good accounting is important!!


It is always best to discuss with a professional whether a limited company set up is the best for you. It is crucial to understand your responsibilities as a director:

  • You will need to follow companies house rules as stated in the articles of association.
  • You are required to keep company records and report any changes.
  • File company accounts and company tax return
  • Tell other shareholders if you might personally benefit from a transaction the company makes
  • Pay corporation tax

You may be fined, prosecuted, or disqualified if you do not meet your responsibilities as a director.


Are you considering changing from sole trader to limited company? Book a call to discuss your options and how we can help you through the process.

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