Starting out as a sole trader is usually the simplest way to run a small business. There’s less admin, fewer formal reporting requirements and you can get on with running the business.
But as your business grows, you may start wondering whether it is time to become a limited company.
There’s no magic profit figure at which every sole trader should incorporate. The right time depends on your individual circumstances, but there are several factors worth considering.
1. Your profits are increasing
One of the main reasons business owners consider becoming a limited company is tax.
As a sole trader, you pay Income Tax and National Insurance on your business profits. A limited company pays Corporation Tax on its profits, and you then pay personal tax on money you take from the company.
For 2026/27, the Corporation Tax rate is 19% for companies with profits of £50,000 or less, rising to 25% for profits above £250,000, with marginal relief available between the two thresholds.
That doesn’t automatically mean a limited company will make you better off. You need to look at the tax on both the company and the money you take out personally.
2. You don’t need to take all the profits out
This is where incorporation can become interesting. When you’re a sole trader, the business profits are effectively your income for tax purposes, whether you actually withdraw the money or leave it sitting in your business bank account.
With a limited company, profits belong to the company. If you don’t need to withdraw everything immediately, you may be able to leave some profits in the company after Corporation Tax and use them to fund future investment, equipment or growth.
That can give a growing business more flexibility, compared with taking profits personally.
3. You’re prepared for more administration
The benefits come with extra responsibilities. A limited company needs to keep company records, prepare and file accounts, submit a Corporation Tax return and meet Companies House requirements. Directors are responsible for ensuring the company meets its legal obligations.
So if your business is relatively small and straightforward, the additional accountancy costs and administration may outweigh any potential tax benefits.
4. You want to bring in a business partner or investor
If you’re planning to bring someone else into the business, a limited company can make this much easier.
A company can issue shares to new shareholders, allowing ownership to be divided between people involved in it. This can be particularly useful if you’re receiving investment, bringing in a business partner or rewarding someone who is helping the business grow.
A sole trader business doesn’t have shares, so bringing another person into the ownership structure can be more complicated.
5. You want to build a business that can continue without you
If your long-term aim is to build a business that has value in its own right, rather than simply creating an income for yourself, operating through a limited company is worth considering.
A company is a separate legal entity and can continue to operate even if the ownership or management changes. This can make it easier to plan for succession, bring in a new owner or eventually sell the business.
6. You want to separate your personal and business finances
Running a limited company can create a clearer separation between your personal finances and those of the business. As a sole trader, there’s no legal distinction between you and the business. With a limited company, the company is a separate legal entity, with its own bank account, assets and liabilities.
That makes it easier to keep track of business finances and see exactly how much money belongs to the company compared with what you have personally available. It also provides a clearer financial structure as the business grows, particularly if you take on employees, enter into larger contracts or make significant investments.
7. You want to improve your business’s credibility
For some businesses, operating as a limited company can help demonstrate that the business is established and has a formal structure.
Some larger organisations may prefer or even require suppliers and contractors to operate through a limited company. Having a company structure can also make it easier to enter into formal contracts with customers and suppliers.
It’s not that a limited company is automatically viewed as more professional than a sole trader. But if you’re targeting larger clients or moving into a more competitive market, consider whether incorporation fits with the image and structure you want for your business.
8. You want flexibility to share profits with family members
A limited company can provide greater flexibility over who receives profits from the business, particularly where family members are genuine shareholders.
A company can pay dividends to its shareholders, as long as there are sufficient profits and the relevant legal requirements are met. For example, if a spouse or another family member owns shares in the company, dividends are paid to them in line with to their shareholding.
This can allow profits to be distributed between family members rather than all of the income being received by one individual.
When to make the move
If your profits are growing, you’re regularly leaving money in the business or you’re planning to expand, it may be worth looking at whether incorporation makes sense.
But don’t make the decision based on turnover or profit alone. Your personal tax position, how much you need to withdraw, your plans for the business and the costs of running a company all need to be considered.
It’s also important to plan the move properly. Transferring an existing sole trader business into a limited company can have tax implications, although Incorporation Relief may be available in some circumstances.
If you’re wondering whether the time is right, talk to your accountant before making the change. A proper comparison of your current position and your future plans can show whether becoming a limited company is likely to benefit you – both now and in the years ahead.
For guidance on setting up and growing a small business, talk to our team of small business accountants in Peterborough. Contact us today for tailored advice and support.
