How to change from sole trader to limited company

Steps to change from sole trader to limited company

Switching from sole trader to a limited company has financial, legal, and tax implications. Getting your accountant or bookkeeper to support you is the best bet for a smooth transition. And, you'll need to complete the following steps.

1. Incorporate your limited company

To set up a limited company, you'll need to:

• Decide on a name. This needs to be unique – it can't be the same as another company already registered
• Appoint a director or directors. This might only be you, or it could be more than one person if your business is bigger
• Prepare a memorandum and articles of association (these set out how you'll run the company)
• Research which business and accounting records you need to keep
• Register with Companies House and choose the SIC code that best describes what your business does

There are incorporation costs as well as ongoing Companies House charges you'll need to factor in, too. If you have employees, you'll also need to set up payroll.

2. Inform HMRC of your sole trader status closure

You need to let HMRC know you're deregistering as a sole trader. You can do this through your government gateway account. You'll also need to send a final Self Assessment tax return. There are some tax reliefs available that could reduce your final bill – be sure to check the tax relief guidance on the HMRC website.

3. Transfer business assets and operations to the new company

Transferring assets to a limited company can be complex. The process typically involves valuing and selling on the assets to the limited company, or assets can form part of an initial investment into the company. It's best to get a professional onboard – your accountant or bookkeeper can support with transferring assets, and you might need a law professional to support with transferring contracts or intellectual property.

4. Open a business bank account under your company name

When you operate as a sole trader, you are, in essence, your own business. This means it's okay to use a personal bank account under your name, and not a separate one for business. Limited companies are separate entities from their owners, and so you need a separate business bank account in place.

You typically need some proof of identity (like a passport or driving license) to open a business bank account, along with your incorporation certificate, company registration number, and trading name. Banks will also require you to disclose some information about your business activities (the goods or services you sell).

5. Communicate the business structure change to stakeholders

Make sure you let the people you work with know about changes to your business structure. When it comes to clients and suppliers, you'll want to make sure invoices and payments are made to the right business, with addresses and contact details up to date. There are lots of ways you could communicate the change. An email with your updated business and payment details is a great start. Make sure you give clients and suppliers plenty of notice before payments and bills are due, so they have the right information on record.

6. Register your company for tax and PAYE compliance

Once you've registered your company, you need to add Corporation Tax services to your online tax account. Unless you've registered the company as dormant, you should be signed up for Corporation Tax automatically. As a company director, you'll also need to continue filing an annual Self Assessment Tax Return (soon to be MTD for IT submissions). If you're earning above £90,000 annually, you'll also need to register your company VAT. And if you have employees, you'll also need to register for PAYE so you can manage staff salaries and HMRC contributions. When it comes to registering for PAYE, you'll need to do this a little in advance of your first payday. It can take a few weeks to receive a PAYE reference number, which you'll need to use to get set up, so bear this in mind when you're starting out.

What’s the difference between a sole trader and a limited company?

When you start a business, one of the first decisions you have to make is whether to register as a sole trader or a limited company. There are pros and cons to being a sole trader or a limited company. Many small businesses and self-employed people start out as sole traders, as it is the simplest way to set up — but there may come a time when you want to change from being a sole trader to a limited company. Some of the main differences between operating as a sole trader and a limited company are:Sole trader

• You and your business are legally the same entity
• Registered through HMRC
• Retain all profits made after tax
• Complete an annual Self Assessment tax return (in the future, you'll need to make MTD for IT submissions)
• Pay income tax and National Insurance on profits
• Your financial information remains private

Limited company

• Your business is a separate legal entity to you
• Registered (incorporated) with Companies House
• Pay yourself a salary and/or dividends from business
• File annual company accounts, plus Self Assessment for your personal tax
• File a Corporation Tax return (CT600) and pay Corporation Tax on profits
• Your business’s financial information may be accessible to others via Companies House – there are exemptions for companies classed as micro-entities or small companies.

Legal structure

Sole traders and their businesses are legally the same entity. This means your business gains and losses are your personal losses, and if things go wrong, you could need to pay business debts or cover losses with your personal assets. Limited companies are separate entities to the people who own them. This means if you run a limited company, losses and gains belong to the company, and you have limited liability (as a director) for them. Setting up as a sole trader is relatively simple, and you retain all of your profits made after tax. So, it can be an easy way to get your business started and begin making money. But, a limited company offers more protection for your personal assets, should you run into financial difficulty. Accounting for a limited company is slightly more complex though, which can be a drawback for those who'd prefer to keep things simple.

Registration process

You register as a sole trader via HMRC. For a limited company, you'll need to register through Companies House. To register as a sole trader, you need:

• Your National Insurance number
• A business name (or you can trade under your own name)
• A way to keep records of income and expenditure for your Income Tax return

To register as a limited company, you need:

• Three pieces of personal information about yourself and any shareholders or guarantors
• A unique trading name that doesn't already appear on the register
• A registered business address
• A memorandum and articles of association

Taxation and profits

Sole traders pay Income Tax and National Insurance via Self Assessment. If you set up a limited company, you still need to complete a Self Assessment tax return. But, you also need to submit company accounts to Companies House, and file a company tax return for Corporation Tax. You can make both of these submissions at the same time if they're covering the same period. The rate of Corporation Tax is currently 25%, and for small profits,19%. In theory, this could mean you pay less tax as a limited company compared to a sole trader, but it really depends on how much you earn.

Earnings and withdrawals

When you're a sole trader, you can take money out of your business at any time. You keep all the profits after tax, so once your bill is settled, the money is yours. Limited companies are separate from their directors, and even if you're the sole director, you can only take money out of your business through a salary and/or dividends. Many directors combine salary and dividends, but it's worth noting that the latter can only be paid to you if the business is making a profit.

Filing requirements

Accounting and bookkeeping can be time consuming, so getting a sense of your filing requirements can help you decide if setting up a limited company is the right move. Your filing requirements as a sole trader are:

A single annual Self Assessment tax return (from April 2026, this is changing, with the implementation of MTD for IT) Your filing requirements as a limited company are:

• A set of full, annual accounts
• A company tax return
• An individual Self Assessment Tax Return for directors

Financial transparency

If you're planning on setting up a limited company, you should also consider how financial records are treated. Sole traders aren't required to share statutory accounts, but limited companies are. Statutory accounts for limited companies include:

• A balance sheet
• A profit and loss report
• Notes about the accounts
• A directors report

If your business is classed as a small company or micro-entity, you might be able to submit simplified accounts. Check the HMRC guidance on filing for small companies.

How long does it take to set up a limited company?

Once you have registered online your company is usually incorporated within 24 hours.

How much does it cost to set up a limited company?

It currently costs £50 to register your limited company with Companies House online, or via software. Paper registration costs £71. HMRC has a full list of Companies House fees online.

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

There are several advantages to switching from a sole trader to a limited company:

1. Limited liability

Because your limited company is a separate legal entity, you are not personally liable for any losses made by the business. If your business fails and incurs debt, you only stand to lose company assets, not personal assets, such as your home. An exception to this is if there is a case of director misconduct.

2. Tax efficiency

Instead of paying income tax (at 20-45%), you will pay Corporation Tax as a limited company, which is currently 19% — so, depending on your profits, you might pay a lower rate.

Your business therefore needs to reach a certain profit threshold before being incorporated becomes more efficient than being a sole trader.

The Chancellor of the Exchequer recently announced that corporation tax will rise to 25% for companies with taxable profits above £250,000 in April 2023. Companies with taxable profits between £50,000 and £250,000 will pay tax at the 25% rate reduced by a marginal relief calculation. Those with profits under £50,000 will continue to pay 19%.

As a limited company you will be liable to pay National Insurance if you pay yourself a salary above the NI threshold (currently £11,908 across the 2022/23 tax year).

Some limited company directors pay themselves a lower salary and take more of their income from dividends.

3. Increased opportunities

Lenders and investors can sometimes favour limited companies over sole traders. Some companies and organisations choose not to work with sole traders, so being a limited company could increase your options.

What are the disadvantages of switching to a limited company?

While there are many advantages to being a limited company, there are some drawbacks to consider, such as:

1. Increased admin

Setting up as a limited company is more complicated and time-consuming, with increased paperwork and admin involved.

2. Less privacy

You have less privacy over your business finances. Company accounts are a public record and can be accessed by anybody.

3. Higher accounting costs

Your accountancy costs may be higher as a limited company due to the additional reporting required.

When to change from a sole trader to a limited company?

Choosing to switch from a sole trader to a limited company is a personal choice. You should think about the financial impact, tax obligations, and time investment required before making your decision. There's also liability protection and business growth to think about. An accountant or bookkeeper can help you make the right call, and will walk you through your obligations.

How to become a limited company

The process of becoming a limited company is known as incorporation. You should speak to an accountant before deciding to make the switch, as they can advise you of the pros and cons for your business.

If you do decide to change from a sole trader to a limited company, here is what you need to do:

1. Choose a name for your company. The rules are different for this than for a sole trader — for example, you cannot have the same name as another registered company.
2. Register the limited company with Companies House (there is a fee of £12 to do this). You will be registered for Corporation Tax at the same time.
3. Let HMRC know that you will no longer be a sole trader. You’ll need to complete a final Self Assessment by 31 January after the end of the tax year.
4. If you plan to pay any salaries to directors (including yourself) or employees, you will need to register as an employer and set up PAYE (unless none of your employees are paid £123 or more a week, get expenses and benefits, have another job or get a pension – but you will still need to keep payroll records).
5. Set up a separate business bank account for your limited company.

Is it worthwhile converting from sole trader to limited company?

The decision to change from a sole trader to a limited company should be considered carefully. Your business turnover, personal circumstances, and individual preferences all need to be taken into account when deciding if it's the right move, and you should seek advice from an accountant, who will be able to guide you accordingly. In the meantime, if you want to understand more about how Making Tax Digital for Income Tax will impact you as a sole trader, take a look at our expert FAQs or dedicated resource hub.