Should I become a limited company?

business owner on the telephone to his accountant discussing whether to become a limited company


Many sole traders are not sure when to make the transition from their current structure to doing business as a limited company. It’s not always obvious when to make the move or if it’s necessary. Here’s what you need to know before doing anything.


What is a limited company?

Start off by understanding the difference between a sole trader and a limited company.

A limited company is a company ‘limited by shares’ or ‘limited by guarantee’.

Limited by shares companies are usually businesses that make a profit. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has shares and shareholders
  • can keep any profits it makes after paying tax

Limited by guarantee companies are usually ‘not for profit’. This means the company:

  • is legally separate from the people who run it
  • has separate finances from your personal ones
  • has guarantors and a ‘guaranteed amount’
  • invests profits it makes back into the company

The business will be required to register with Companies House and also make specific information publicly available.


Tax implications

As a sole trader, you are required to pay tax and national insurance on your income.

If you are the director of a limited company, then the money you earn will be the revenue for your company. You will be able to withdraw some of this as a salary, a dividend or choose to leave it all in the company.

As a limited company, you will also be paying corporation tax on your profits.


More hireable

You may find that you are able to attract more customers as a limited company. It can sometimes improve your desirability to larger organisations or help you when tendering for new contracts.


Director responsibilities

As a director of a limited company, you have responsibilities that you must adhere to by law.

As a director of a limited company, you must:

  • follow the company’s rules, shown in its articles of association
  • keep company records and report changes
  • file your accounts and your Company Tax Return
  • tell other shareholders if you might personally benefit from a transaction the company makes
  • pay Corporation Tax

You may be fined, prosecuted or disqualified if you do not meet your responsibilities as a director. Anyone can report a company director’s conduct as being ‘unfit’.

‘Unfit conduct’ includes:

  • allowing a company to continue trading when it can’t pay its debts
  • not keeping proper company accounting records
  • not sending accounts and returns to Companies House
  • not paying the tax owed by the company
  • using company money or assets for personal benefit


Get professional support

Before deciding whether to move your business from being a sole trader to a limited company, seek professional guidance.

Ensure you understand both the implications and the advantages. Be clear about what is required of you as a limited company and implement processes to meet those requirements. Don’t rush into the decision.

We offer a 30-minute free consultation with one of our experienced business consultants. Contact us on 01424 776 214 to make an appointment.


Further information

If you found this information useful, you may also want to check out the following:


MRA specialise in business solutions, and are Life Centred Business Consultants based in East Sussex we service clients across the South East, Sussex and Kent, including smaller towns such as Ashford, Battle, Bexhill, Bodiam, Brighton & Hove, Cranbrook, Crowborough, Eastbourne, Hailsham, Hastings, Heathfield, Herstmonceux, Lewes, Mayfield, Newhaven, Rye, Seaford, Sevenoaks, Tenterden, Tonbridge and Tunbridge Wells