Every business chooses a legal structure that suits them when they begin their journey, but what happens if you want to change the structure, due to growth or new opportunities? This article will look at the differences between sole trader structures and limited companies, and explain how you can change from one to another if you choose to. We’ll look at the following areas: 

  • What’s the difference between a sole trader and a limited company?
  • What’s the right time to change from sole trader to limited company?
  • How to change from a sole trader to a limited company?

What’s the difference between a sole trader and a limited company?

First, what are the differences between the two types of company structure?

Sole trader

A sole trader is a self-employed person who is the sole owner of their business. It’s a very simple business structure, and allows the owner control of all aspects of the business, which is likely why it’s the most common type of business structure.

Sole traders are entitled to keep all profit earned after taxes but are also personally responsible for any debts their business undertakes, unlike limited companies who will enjoy limited liability for any business debts. 

Limited company

A limited company is a business structure where the business is its own legal entity, separate from the owner or owners (the shareholders) and the people who manage it (directors). This can still be a one-person business, where the owner acts as both shareholder and director and the business is completely independent from their own personal credit file and finances.

When operating as a limited company, you’ll be acting as an employee of the business. Even though you are the owner and manager, from a tax perspective you will be paid as an employee for the business. As a limited company owner, you will pay yourself via PAYE, and will manage your tax and National Insurance as a business owner and employer, and not as a ‘self-employed’ person in the eyes of HMRC, meaning you won’t have to submit your taxes through a self-assessment. 

What’s the right time to change from sole trader to limited company?

The change from sole trader to limited company is a very personal choice to make, and there are many things you should consider before making the change. Some questions to ask yourself to decide if it is time to make the change are:

  • Will I pay less tax by operating as a limited company?
  • Will I receive a higher take-home pay by using a limited company? 
  • Will the more ‘professional’ image of a limited company help me attract more customers/clients and grow the business?
  • Will I benefit from limited liability? Do I need my personal assets to be protected should the business go bankrupt?
  • Do I want to bring in investors, secure funding, or find business partners in the future?
  • Are these other benefits worth the extra filing, record keeping and administrative requirements that limited companies are legally required to manage?

The choice you make about your business structure can impact every aspect of your business from your bottom line, to the paperwork you have to carry out. Being honest about the answers to the above questions, and weighing up those options is important because you might end up spending more of your valuable time on administrative tasks when you could be growing the business. 

It might also be worth considering finding support from an accountant for these crucial business decisions. Not only will they have the tax and financial experience to help you make an informed decision, but they could save you hours of accounting and bookkeeping admin since a limited company has much more record filing responsibilities. They will be able to support many aspects of your business as well as helping you through this transition period.

How do I change from a sole trader to a limited company?

To change from a self-employed person to operating as a limited company, you will need to take the following steps:

  • Register your business with Companies House. This registration is called incorporation, and will cost you £12. You can operate under the name you were using as a sole trader, or choose something new. But you should always check that your business name is available or you could face legal issues.
  • There are a few steps you’ll need to take with HMRC. First, get in touch with HMRC to inform them of the change to your company structure.
  • Next with HMRC, set up your salary payments through PAYE as you’ll be paying yourself as an employee. 
  • You’ll also need to register for Corporation Tax, and VAT if your business is likely to turn over more than £85,000.
  • Finally use an online form, to inform HMRC that you are deregistering as self-employed.
  • Set up a business account if you haven’t already got one. Limited companies legally must have a separate account.
  • Transfer the sole trader company and any assets it has to the new business. This is a bit more complicated, so you could seek support from an accountant or financial advisor for this process. Your new company basically has to buy the assets (eg, cash, equipment or vehicles) from the old company, so the value of the assets can be paid immediately, or treated as a loan to be repaid over a period of time, or paid in full at a point in the future.

If you change your mind and decide that you prefer to operate as a sole trader, you will have to HMRC of the change and re-register as self-employed. 

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