Last updated Apr 29, 2024 and written by Aditi Mohan

When Should I Change from a Sole Trader to an LTD?

Many first-time business owners choose to set up as a sole trader over becoming an LTD. Starting as a sole trader can be more appealing as it's straightforward and easier than incorporating as a Limited Company.

However, as a business grows, being a sole trader can become more of a restriction than a benefit. In this blog, we’ll explore when you should consider moving from a sole trader to an LTD business structure. 

Protect Your Business Name

As a sole trader, your company’s name is unprotected as it is not ‘officially’ registered anywhere. Due to this, it is possible that another business can use your name to trade and even register as their own. This means you can lose the right to use your company name and you may need to rebrand which can have impactful consequences.

If your business has a growing reputation and brand identity you may want to become an LTD to protect your brand. By ensuring your name is registered other companies can’t poach your name and you have the right to contest any new businesses whose names are similar to yours due to the Companies Act 2006.

If protecting your brand identity is a major concern for you, then switching from sole trader to LTD is the quickest and easiest way to protect your company name.

Making the Most Out Of Your Income

Another reason to switch to an LTD formation is when you start earning over a certain threshold. As your revenue picks up the tax savings from becoming an LTD can help you keep more of your profits.

While there isn’t a set amount you need to earn, the best time to switch is when you’re earning enough that the costs of running an LTD are less than the savings from the LTD tax structure.

The main costs of running an LTD come from any fees owed to Companies House, such as your annual confirmation statement fee which costs £13 per year. This fee is rising to £34 from May 1st 2024 and the fee to incorporate your company. On top of these, you may choose to pay for a registered office service to keep your residential address off the public register and an accountant. While these are not necessary expenses, they can make your life and business run more efficiently and safely. 

What tax savings can I make?

As a sole trader, you pay Income Tax on all profits above the £12750 personal allowance threshold. You will also pay Class 4 National Insurance Contributions, which means if you earn over £50,270 a year you’ll pay around 40% Income Tax. This hugely eats into your profits, especially if your business is a side hustle alongside a salaried job.

Limited Companies, on the other hand, pay Corporation Tax which is taxed at a lower rate than Income Tax. Secondly, as the company’s director (manager) and shareholder (owner), you can choose to pay yourself a small salary and earn the rest of your income through dividends. Dividends are taxed at a lower rate than salary income and it’s not subject to National Insurance Contributions.

By switching to an LTD formation type you can increase your profits and increase your personal income too. 

Enhancing Your Professional Reputation

Being an LTD comes with an enhanced professional reputation, potential clients, partners and investors associate limited companies with reliability, security, and professionalism.

By becoming an LTD your brand expands its reputation to add a ‘reputable and registered’ company. This security can go a long way, it can open your company up to new investors, it can attract bigger clients and it can expose your business to more people through the Companies House register.

Finally, due to the new Economic Crime and Corporate Transparency Act, a company registered with Companies House now comes with an extra stamp of reliability. Since the UK registrar is cracking down on illegitimate businesses and expelling them, your company name on the register will show that you are a legitimate business. Whereas, as a sole trader, this reliability and legitimacy is based on trust between you and a client/partner/investor.

Protecting Your Assets

As a sole trader, you are entirely liable for your company’s debt. You and your business are one entity in the eyes of the law. If the worst should happen you are liable for your company’s debt. In extreme cases, this can cause huge personal debt for you.

As an LTD, your business is a separate legal entity from you. You will only be liable for what you put in. The same stands for any new shareholders you add to the company. If you feel as if the personal liability of your business adds unnecessary pressure, switching to an LTD is the best solution. It also means that in the future you can bring on more shareholders and even plan for succession once you are ready to step down as owner. 

How To Change From Sole Trader to LTD

Changing your company structure can be a bit confusing, so why not leave the work to us. As a company formation agent, we can help you transition from sole trader to LTD and help with additional services along the way.

You can switch from sole trader to LTD in four easy steps with us: 

  • Choose your company name- use our company name search to check your company name is available. 
  • Pick your package- each package has a different level of additional services to help you set your LTD up on the right foot,
  • Checkout-purchase your formation package and mix and match any added services to suit your needs. 
  • Complete your company details- make sure to submit your ID and other necessary documentation to ensure there is no delay in incorporating your LTD. 

We can also help set you up with a business bank account from our trusted banks and an accountant to aid the transition.