How to switch from a sole trader to a limited company: Key steps and tips to follow

Published Friday 5 December 2025

Table of contents

• What's the difference between a sole trader and a limited company?
• When to change from a sole trader to a limited company?
• What are the benefits of changing from sole trader to limited company?
• What are the disadvantages of switching to a limited company?
• Steps to change from sole trader to limited company
• How long does it take to set up a limited company?
• How much does it cost to set up a limited company?
• Is it worthwhile converting from sole trader to limited company?
• Managing your business finances with Xero
• FAQs on changing from sole trader to limited company

Key takeaways

• Consider converting to a limited company when your annual profits exceed £50,000, as Corporation Tax rates (19-25%) become more favourable than Income Tax rates (20-45%) for sole traders.

• Recognize that limited company status protects your personal assets from business debts by creating a separate legal entity, but requires increased administration including public financial records and more complex filing requirements.

• Follow the six-step conversion process: incorporate with Companies House, inform HMRC of sole trader closure, transfer business assets, open a company bank account, communicate changes to stakeholders, and register for Corporation Tax and PAYE compliance.

• Utilize accounting software to manage the increased bookkeeping and reporting requirements that come with limited company status, including company accounts, Corporation Tax returns, and payroll if you have employees.

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

Business structure determines your legal status, tax obligations, and personal liability. The main differences between sole traders and limited companies affect how you pay tax, manage liability, and handle business finances.

Here are key structural differences.

Sole trader

• Legal status: You and your business are the same entity
• Registration: Register through His Majesty’s Revenue and Customs (HMRC)
• Profits: Keep all profits after tax
• Tax filing: Annual Self Assessment return
• Tax rates: Income tax and National Insurance on profits
• Privacy: Financial information remains private

Limited company

• Legal status: Business is separate from you personally
• Registration: Incorporate with Companies House
• Profits: Pay yourself salary and/or dividends
• Tax filing: Company accounts plus personal Self Assessment
• Tax rates: Corporation Tax on profits (19-25%)
• Privacy: Company accounts are public record

Legal protection differences

• Sole trader liability: You're personally responsible for all business debts and losses. Your personal assets (home, savings) are at risk if the business fails.
• Limited company liability: The company is legally separate from you. Your personal assets are protected, and you're only liable for company debts in cases of director misconduct.

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 more complex, so it may not suit you if you prefer to keep things very 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 Making Tax Digital for Income Tax (MTD for IT), which requires those with over £50,000 in gross income from trade and property to comply with Making Tax Digital)

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, especially as new regulations have increased company size thresholds by around 50% to reduce the reporting burden. Check the HMRC guidance on filing for small companies.

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

When to make the switch depends on specific business triggers:

Consider converting when:

• Annual profits exceed £50,000: Corporation Tax rates become more favourable
• Personal liability concerns increase: Higher-value contracts or business risks
• Growth plans require investment: Better access to funding and business partnerships

Consult an accountant to calculate your specific tax savings and assess timing based on your business circumstances.

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

Key benefits of converting to limited company:

• Limited liability protection: Your personal assets are protected from business debts and losses
• Tax efficiency: Pay Corporation Tax (19 – 25%) instead of Income Tax (20 – 45%) on profits
• Business credibility: Access to more suppliers, clients, and funding opportunities who prefer working with limited companies

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.

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’ll be liable to pay National Insurance (NI) 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.

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?

Potential disadvantages to consider:

• Increased administration: More complex accounting, filing requirements, and ongoing compliance obligations
• Reduced privacy: Company accounts and director details become public record through Companies House
• Higher costs: Additional accountancy fees, Companies House charges, and potential professional service costs

Increased admin

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

Less privacy

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

Higher accounting costs

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

Steps to change from sole trader to limited company

The conversion process involves six key steps that typically take 2-4 weeks to complete. Each step addresses specific legal, financial, and tax requirements.

Working with an accountant ensures compliance and maximises tax benefits. Here's what you need to do:

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 Standard Industrial Classification (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. You need to follow specific tax rules and may be able to claim incorporation relief when you move the whole business into the company. 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 a year, you'll also need to register your company for Value Added Tax (VAT). And if you have employees, you'll also need to register for Pay As You Earn (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.

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

Here's the complete timeline it often takes to set up your limited company:

• Preparation: 1-2 weeks (gather documents, choose name, prepare articles)
• Registration: 24 hours (online submission to Companies House)
• Post-registration setup: 1-2 weeks (bank account, tax registration, asset transfer)

Total process: 2-4 weeks from start to full operation as a limited company.

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

Here are common registration costs to consider when setting up a limited company.

• Online registration: £50 (Companies House fee)
• Paper registration: £71 (slower processing)
• Ongoing annual costs: £13 confirmation statement fee

Additional costs may include accountancy fees (£500-2,000+ annually) and professional services for complex asset transfers.

Is it worthwhile converting from sole trader to limited company?

Making the right decision requires calculating your potential tax savings and assessing your business growth plans.

Use accounting software to track your profits and cash flow patterns. This data helps you and your accountant determine the optimal conversion timing and structure.

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.

Managing your business finances with Xero

Switching to a limited company brings new responsibilities, like filing company accounts and running payroll. The right software makes a real difference. Xero helps you handle these tasks easily, so you can run your business, not just your books.

With automated bank feeds, simple payroll, and clear financial reports, you'll have everything you need to stay compliant and in control. It gives you a real-time view of your cash flow, helping you make smarter decisions as your business grows. If you're ready to see how Xero can support your new limited company, you can try Xero for free.

FAQs on changing from sole trader to limited company

Here are answers to some common questions about making the switch.

Can I keep my sole trader bank account for my limited company?

No, you can't. A limited company is a separate legal entity from you, so it must have its own dedicated business bank account. You'll need to open a new account in your company's name once it's registered with Companies House.

What happens to my business assets when I switch?

You'll need to formally transfer any business assets, like equipment, stock, or intellectual property, from yourself to the new limited company. This is often done by 'selling' the assets to the company at their current market value. It's a good idea to get advice from an accountant to handle this correctly.

Do I need an accountant to change to a limited company?

While it's not legally required, it's highly recommended. An accountant can advise if it's the right financial move for you, help with the incorporation process, ensure you transfer assets correctly, and manage the more complex tax and filing requirements. This support can save you time and prevent costly mistakes.