As your business grows, it’s natural to start questioning how your business is set up. Many small business owners reach a point where the words “limited company” keep popping up, from accountants, other founders, or even those late-night business forums we all scroll through now and then.
But is making the switch from sole trader to limited company right for you? Like most big decisions in business, the answer isn’t black and white. Here’s what to consider: the pros, the cons, the timing, and the tax talk.
The pros: why a limited company might make sense
1. Tax efficiency
Once your profits grow beyond a certain point (typically £30k to £50k+), a limited company structure can reduce your tax bill. You’ll usually pay yourself through a mix of salary and dividends, which are taxed differently from sole trader income. This can be more efficient than paying income tax and self employed National Insurance on everything you earn.
2. Limited liability
As a sole trader, you and your business are legally the same thing. That means if your business gets into debt, your personal assets (including your home) could be at risk. A limited company is a separate legal entity, so you’re generally not personally liable for its debts.
3. Perception
Some clients and suppliers see a limited company as more “official” or established. Rightly or wrongly this can open doors to bigger contracts or collaborations, especially in corporate or public sector work.
4. Pension flexibility
Limited companies can contribute to your pension in a more tax-efficient way, which can be a great way of saving tax, and also of future proofing your finances.
The cons: why sticking with sole trader might suit you better (for now)
1. More admin and costs
Limited companies come with extra responsibilities. Annual accounts, Corporation Tax returns, Companies House filings… and often higher accountancy fees. If admin already feels like a struggle, this is worth bearing in mind.
2. Less privacy
Limited company accounts are available on public record at Companies House. That means anyone can see your business’s financials. Currently that is limited to balance sheet information, but Companies House will require companies to also file their profit and loss in the not too dim and distant future. If you want to keep your business finances private, then a limited company may not be for you.
3. Tighter rules
You’ll need to follow stricter regulations and keep business and personal finances completely separate. It’s nothing scary, but it does require a mindset shift.
4. Taking money out is less flexible
Unlike as a sole trader, where you can draw money out whenever you like, limited company funds belong to the company, not you. You’ll need to pay yourself formally through salary or dividends. Keeping track of what you have paid yourself and how much tax you owe is really important.
Timing matters: when’s the right time to switch?
There is no one-size-fits-all answer, but a few common signs that it might be time to consider switching include:
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You’re regularly making more than £30k profit
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The business is growing or you want to take on bigger contracts
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Bringing in other directors or investors is starting to seem like a good idea
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You want stronger legal protection for your personal assets
If your business is still finding its feet, or your income varies from year to year, it might be best to hold off until you’ve got more financial stability.
At Starfish, we always say: don’t let fear of the unknown push you into a decision before you’re ready. We’ll help you assess the numbers and your comfort levels. Making a decision based on cold hard facts on your business performance makes it easier.
Tax implications: what really changes?
The tax landscape shifts quite a bit between sole trader and limited company. Here’s a simplified view:
| Category | Sole Trader | Limited Company |
|---|---|---|
| Tax paid | Income Tax + National Insurance | Corporation Tax + Dividend Tax |
| Personal liability | Unlimited | Limited |
| Profit withdrawals | Anytime | Via salary/dividends |
| Pension contributions | Personal basis | Can be employer contributions (tax deductible) |
One key difference is that your tax deadlines and paperwork change, so getting into a new rhythm with your accountant (or finding one you trust) is important.
What’s right for you?
We know from experience, this decision isn’t just about numbers. It’s about mindset.
Becoming a limited company can feel like stepping into a new identity as a business owner. For some, it’s a confidence boost. For others, it can feel scary. And it is a very different way of operating. If you are ready to make the step then make sure you have the right support in place, and that you understand how the change will work in practice.
That’s what we’re here for.
Our advice? Don’t rush
Whether you’re a creative freelancer, a coach, a consultant, or running a product-based business, your business journey is unique. There’s no pressure to switch unless it makes sense for your goals and values.
At Starfish, we don’t do pushy. We take the time to understand what’s driving you, where you want to go, and what pace works best for you. If that means staying sole trader for another year – great. If it means setting up a limited company next month – we’ll help make that smooth and stress-free.
Ready to explore whether a limited company is your next step? Get in touch and we’ll walk you through the numbers, the timing, and the options.
