How do I switch from sole trader to limited company?

Many business owners start out as sole traders because it is simple and flexible. However, as your business grows, you may reach a point where forming a limited company makes more sense. Incorporating can reduce personal risk, offer tax advantages, and improve your professional image. This article explains how to switch from being a sole trader to running a limited company, what legal and tax steps are involved, and how accountants help make the transition smooth.

Becoming a limited company is a major milestone in your business journey. It changes how you pay tax, how profits are withdrawn, and how your business is viewed legally. The process is straightforward, but there are several important details to get right to avoid complications with HMRC and Companies House.

1. Decide when to make the switch

The best time to move from sole trader to limited company depends on your income, business goals, and risk profile. Many business owners incorporate when:

  • Profits increase and they want to reduce personal tax liability.

  • They want to limit personal financial risk.

  • They plan to employ staff or attract investors.

  • They want to improve credibility with clients or suppliers.

Before switching, it is wise to speak with an accountant who can calculate potential tax savings and explain how your responsibilities will change.

2. Choose your company name

You must register your company with Companies House and choose a name that is unique and not too similar to an existing business. You can check name availability on the Companies House website.

If your sole trader business already trades under a specific name, you can usually keep using it but must add Limited or Ltd at the end.

It is also worth securing a matching domain name and updating your business branding to reflect the new structure.

3. Register your limited company

To form your company, you need to provide Companies House with:

  • The company name.

  • A registered office address.

  • At least one director (you can be the only one).

  • Details of shareholders and share capital.

  • Standard Industrial Classification (SIC) codes describing your business activities.

You can register online in less than 24 hours, or your accountant can handle the registration for you. Once approved, you will receive a Certificate of Incorporation, confirming that your company legally exists.

4. Register for Corporation Tax

After incorporation, you must register the new company for Corporation Tax within three months of starting to trade. This can be done online through your HMRC business account.

Your company will then be required to file annual accounts and a Corporation Tax return (CT600) each year. An accountant will help you set up accounting periods and ensure you claim all allowable expenses.

5. Inform HMRC that you are stopping as a sole trader

Once your limited company begins trading, you need to tell HMRC that you have stopped self-employment. You can do this by completing the ‘closing your sole trader business’ section in your HMRC account or by filing your final Self Assessment tax return as a sole trader.

Be sure to:

  • Declare any income up to the date you stopped trading as a sole trader.

  • Pay any outstanding Income Tax and National Insurance.

  • Cancel your sole trader VAT registration if applicable, or transfer it to the company.

6. Transfer your business assets and contracts

You can transfer your sole trader assets (such as equipment, stock, or goodwill) to the limited company. This can be done either by selling them to the company or gifting them. The value of these assets becomes part of the company’s balance sheet.

If your business has existing contracts, supplier agreements, or client retainers, notify those parties about the change in business structure. In most cases, contracts need to be reissued in the limited company’s name.

If you rent business premises, your lease may also need updating to reflect the new entity.

7. Open a business bank account

A limited company must have its own business bank account because it is legally separate from you as an individual. You cannot use your personal or old sole trader account for company transactions.

Once opened, use the company account for all business income and expenses. You can then pay yourself through a salary or dividends, which your accountant will help structure tax efficiently.

8. Register for VAT if necessary

If your turnover exceeds £90,000 in a 12-month period, you must register for VAT. If you were already VAT registered as a sole trader, you can transfer your VAT registration to the new company.

Even if your turnover is below the threshold, voluntary registration can help reclaim VAT on expenses and improve credibility with clients.

9. Set up PAYE if you will pay yourself a salary

As a director, you are classed as an employee of the company. This means the company must register for PAYE (Pay As You Earn) if you plan to pay yourself or other staff a salary.

The PAYE system deducts Income Tax and National Insurance from wages before they are paid. Many company directors combine a small salary with dividends to maximise tax efficiency.

10. Update insurance and legal documents

Your existing business insurance policies, such as professional indemnity, public liability, or employer’s liability, should be updated or reissued in the company’s name.

If you operate in a regulated industry, such as law or finance, notify your professional body about the change in structure. This ensures your company remains compliant and covered.

11. Manage your new accounting responsibilities

Running a limited company involves more accounting and reporting obligations than being a sole trader. You must:

  • File annual accounts with Companies House.

  • Submit Corporation Tax returns to HMRC.

  • Keep digital financial records under Making Tax Digital.

  • File Confirmation Statements each year.

  • Maintain records of all company directors and shareholders.

Most companies appoint an accountant to manage these tasks, prepare year-end accounts, and advise on tax planning.

Example in practice

A freelance consultant earning £60,000 a year decides to switch from sole trader to limited company status. Their accountant calculates that by taking a small salary and the rest as dividends, they could save over £2,000 in tax each year.

The accountant registers the company, transfers the VAT number, sets up PAYE, and ensures all client contracts are updated. Within a few weeks, the consultant is trading under the new company and fully compliant with HMRC and Companies House requirements.

The role of accountants in the transition

Switching to a limited company involves both legal and tax changes. Accountants help by:

  • Handling registration with Companies House and HMRC.

  • Advising on the best share structure.

  • Managing VAT and PAYE setup.

  • Transferring business assets efficiently.

  • Creating a tax-efficient strategy for salary and dividends.

  • Preparing opening balance sheets and future accounts.

Their guidance ensures you meet all obligations from day one and avoid costly mistakes.

Conclusion

You can switch from sole trader to limited company in a few simple steps, but it is essential to follow the correct legal and tax procedures. While incorporation offers benefits such as limited liability, potential tax savings, and a more professional image, it also brings greater responsibility for compliance.

With the help of an experienced accountant, the transition can be smooth, compliant, and financially rewarding, allowing you to grow your business under a stronger and more credible structure.