When should a sole trader become a limited company?
Posted on 22nd July 2021
Do you think it might be time to change from operating as a sole trader and evolve your business into a limited company? If so, read on.
First of all, what’s the difference between a sole trader and a limited company?
A sole trader is a self-employed person who is the sole legal owner of their business. Your income is all the profit after your taxes are paid. Everything you need to know about the tax compliancy and setup required as a sole trader can be found here on the GOV.UK website.
Did you know that as a sole trader you can still employ other people? You do not need to set up a limited company just because you need more hands-on-deck. Although you operate the business on your own, you do not have to work alone. Sole trader means you are trading under your own name. Depending on the business need a sole trader can employ a permanent member of staff or contract a freelancer.
A limited company is a business structure where it has its own legal identity, separate from its owners/shareholders and its manging directors. This still applies even if you’re a one-person company, who acts as both as shareholder and director.
Many self-employed people and small businesses start off as sole traders. This is the easiest way to start your new venture without too much hassle.
Why would incorporation into a limited company be worth the extra time needed, commitment required and, quite frankly, way more paperwork?
- Increased tax-efficiency
- Limited liability protection
- Greater borrowing power
- Improved credibility
- Investment potential
- Paid salary and dividends
- Minimise PAYE and NIC outgoings
- Mileage allowance and a larger range of claimable expenses
When your enterprise as a sole trader really starts to take off and profits come flowing in, you may feel it’s time to make the next steps needed in order to take advantage of all the reasons listed above.
It could be that you feel it’s time you gained the kudos and reputation of trading as a limited company. This change could help you to secure bigger and more profitable clients.
Maybe you need investment in order to progress your business ideas to the next level. By incorporating your company and selling shares, this can help boost your company’s value.
Perhaps you’d like to start sharing the responsibility of running your venture with another person or multiple people. As a company you can bring people in as directors and/or shareholders.
What are the requirements?
- You must register your business with Companies House.
- Inform the HMRC, your insurer and accountant that your company’s legal structure has changed.
- Set up a new business bank account in the company’s name.
- Each tax-year a limited company has to file a Set of Accounts, a Confirmation Statement and a Corporation Tax Return.
- In most case the directors also have to file a personal tax return with the HMRC.
- If the company has employees who draw a salary, it will need to be set up a payroll as an employer.
- The director of a limited company has legal responsibilities, including safeguarding the company’s assets and making the decision to stop trading if they knew the company was in financial difficulties and couldn’t survive.
Is it right for you?
Ask yourself if you ready for the extra time involved in running your business as a limited company.
Make sure that it’s the right choice for your personal and financial circumstances.
Use the information provided above to weigh up the pros and cons of incorporating your business.
If you’re ready to set up a limited company of your own, or you want to explore this as an option for you, please contact us and we can advise you on the next steps to take.
Nicola J Sorrell -
Founder | Xero Champion | IR35 Expert
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