How to change from sole trader to limited company

The decision to change from being a sole trader to a limited company is not one to be taken lightly. There are a number of factors to consider, such as the size of your business, your growth plans, and the level of liability you are willing to assume. As a sole trader, you are personally responsible for all aspects of the business, from its debts to its reputation.

This can be both a positive and a negative, as it gives you a great deal of control but also puts you at risk if things go wrong. Changing to a limited company can help to mitigate this risk, as it separates your personal finances from those of the business.

However, it also comes with additional red tape andcompliance costs. Ultimately, the decision comes down to balancing the risks and rewards associated with each option.

This new trading style involves more responsibility but there are also more benefits. This allows directors and share holders to be more involved as well as having a limited liability umbrella.

This is why many individuals make the move from sole trader to ltd once their business becomes more successful and grown in to a company. If you are considering the options of changing your business to a limited company and its legal structure here’s how to get started.

What is a Sole Trader?

A sole trader is an individual who owns and runs their own business. They are usually the only employees of their business, and they are responsible for all aspects of the business, from finding customers to managing finances. Sole traders can be found in a wide variety of businesses, from small shops to large online companies. One of the main advantages of being a sole trader is that you have complete control over your business. You can make all the decisions about what products or services to sell, how to market your business, and how to manage your finances.

This means that you can keep all the profits from your business, but it also means that you are responsible for any losses. Another advantage of being a sole trader is that it can be relatively easy to set up a business as a sole trader. You don’t need to register with Companies House or comply with complex financial regulations. However, one of the main disadvantages of being a sole trader is that you are personally responsible for all the debts of your business. This means that if your business fails, you could end up losing your home or having to declare bankruptcy.

Another disadvantage of being a sole trader is that it can be difficult to raise money to grow your business. Because you are the only owner of your business, you can’t sell shares in your company to investors. This means that you will need to either reinvest any profits you make back into your business or take out loans from banks or other financial institutions. Being a sole trader can be a great way to be your own boss and have complete control over your business. However, it’s important to understand the risks involved before you decide to become a sole trader.

What is a Limited Company?

A limited company is a type of business entity in the United Kingdom. It is a company whose liability is limited to its equity shareholders. A limited company may be privately held or publicly traded. The main advantage of incorporation as a limited company is that it limits the liability of its shareholders. If the company becomes insolvent, the shareholders will not be held liable for the debts of the company beyond the amount of their investment. This protects the personal assets of the shareholders from being used to pay off the debts of the business.

Another advantage of a limited company is that it can raise capital by selling shares to investors. This allows the company to grow and expand more quickly than if it were financed solely by debt. Finally, a limited company has a perpetual existence; it can continue to exist even if its shareholders die or sell their shares. This makes it easier for businesses to succession plan and pass on ownership to future generations.

Limited companies are also subject to certain regulations, such as filing annual financial statements and holding shareholder meetings. These requirements help to provide transparency and accountability, which can instill confidence in investors and other stakeholders.

Sole Trader vs Limited Company: the key differences

When starting a business, there are two main choices for legal structure: sole trader or limited company. Each has its own advantages and disadvantages, so it’s important to choose the right one for your business. As a sole trader, you’ll be self-employed and will have complete control over your business. However, you’ll also be personally liable for any debts or losses incurred by the business.

A limited company, on the other hand, offers limited liability protection for its shareholders. This means that you won’t be held personally responsible if the business fails. However, setting up a limited company can be more complex and expensive than going it alone as a sole trader. Ultimately, the best option for you will depend on your individual circumstances.

If you’re starting a small business with minimal risk, then going solo as a sole trader may be the best option. But if you’re embarking on a more ambitious venture, then setting up a limited company could give you the protection you need to succeed.

When is the right time to form a Limited Company?

Typically, people start contracting or freelancing as a sole trader for the ease of set-up and potentially lower administrative burden when compared to setting up a limited company. After increasing their earnings, though, many sole traders then consider forming a limited company to pay less tax and increase their attractiveness to potential clients. The time may also be right to involve others in your business as directors and shareholders.

The common consensus is that when your earnings remain low, it may be best to remain as a sole trader, unless you need other benefits such as limited liability. As a sole trader, your tax and accounting responsibilities will be relatively simple – maybe even simple enough to do it yourself if you’re really organised.

How long will it take to set up my new limited company?

Setting up a new limited company can take up-to 24 hours, if you start by completing the online registration process on the Gov.uk website. Once done, your new limited company should be available to be seen on Companies House website. If you are not computer savvy and rather do it via post, the processing time can take up to 10-14 days but you will pay a small premium.

If you decide on an accountant to set up your limited company, you must factor in their quoted lead time. The costs for using an accountant is about £100.00 allowing up to two weeks in this case, depending on how busy they are.

You should also allow time for planning your company name. It is possible to buy ready-made limited company names, but far more preferable to come up with your own. In order to do so, you must send a memorandum of association (the company name, registered office and nature of your business), completed IN01 form and articles of association (this sets out the rules for the running and regulation of the company) to Companies House. Happily, this is all part of the Gov.uk registration process.

It is important to carefully consider how you plan to fund the business. Depending on how much funding you need, or if you need any kind of commercial business finance then it can have an impact on how long it takes to get the company rolling. The finance options you have available will naturally have an effect on the time it takes to set up the company.

Converting your business from Sole Trader to Limited Company

1. Let your customers, clients, suppliers, business services, and insurers know that you’re going to be changing to a limited company. Some make the incorrect assumption that a company director can’t be held responsible for their company’s debts or insolvency, but action can be taken to recover funds in some circumstances. You’ll need to change your current insurance to cover this.

2. Let HMRC know you’re not a sole trader anymore. You’ll still need to file a Self Assessment for the previous tax year as a sole trader.

3. Register your company with HMRC. It costs £12 and should be processed within 24 hours. This is a good time to make sure you have a separate business bank account too.

4. Register for Corporation Tax within 3 months of starting business. Starting a business can include lots of different things, including making a single purchase or renting premises, so check the list and make sure you’ve got a reminder set before the 3-month point.

5. Set up VAT registration if you’ve not already done it as a sole trader. If you already registered as a sole trader, you’ll need to cancel and re-register as a limited company.

6. Register your company as an employer, even if you’re the only member of staff. This allows you to pay yourself a salary from the company’s profits, and employ more staff in future if you want to.

For more information, HMRC have comprehensive guides to setting up, running, and managing a limited company. There’s lots of information to follow and understand, so using the services of a good, trustworthy accountant is particularly important.

If you’re planning to move to a limited company, it’s probably a time of exciting change and growth for your business.