Thinking of Changing From Sole Trader to Limited Company?
If you are running your business as a sole trader at some point you may start thinking of changing from Sole Trader to Limited Company.
This is quite common practice. Many businesses start with carrying on their business activities as sole traders. Then some of them change from sole trader to limited company.
This shift usually occurs when a business outgrows the sole trader business structure.
There may be certain reasons for you to think about changing your business structure. They may and may not be sufficient to actually start the process.
Thus, when deciding on such important things as changing the legal structure every business owner must lean on solid facts only and not his personal perceptions. Your ultimate purpose is to derive the greatest benefit for your business from every change you make.
Below are the most common reasons to change from Sole Trader to Limited Company:
- Limited Company Formation Process is quick and affordable. Usually you get your new company up and running in 3 hours only.
- Limited Company structure can help you to save tax.
- Limited Company is a separate legal entity. It limits the liability of shareholders and directors. This means that your liability as a shareholder for any debts incurred by the company is limited to your shares in that company. Your personal assets cannot be seized to pay company debts.
- Being a company positively impacts your image in the eyes of your customers, suppliers, partners and basically everyone else. People tend to have more faith in a business if it is a registered company.
- Legal and financial mechanisms are easily accessible for Limited Companies to get investment and raise capital.
- It is far easier to expand your business being a company rather than being a sole trader.
- Your business name will be automatically registered together with your company.
Important things to keep in mind:
- You and your limited company are not the same thing/person from a legal perspective.
- You’ll need to open a new bank account for your limited company.
- Limited company means more paperwork (but that shouldn’t be a problem as long as you are going big, right?).
- Company funds are not considered to be your own funds unless they’ve been paid to you in the form of dividends.
- If you will appoint yourself as a company director you will have certain legal duties to fulfil. For example, you will have to manage your company’s resources and finances.
- Limited company records (e.g. registered address, directors, etc.) are in the public domain and available for everyone to see. This means less privacy for you.
Obviously, there are some pros and cons of changing from Sole Trader to Limited Company. The good news is that they are pretty straightforward.
In essence, the most important differences are: limited liability (this is actually the nature of Limited Company – the reason why this legal structure actually exists. With a limited company you have a limited liability protection) and access to investment/capital raising mechanisms.
If these reasons coincide with your situation, then you can start with the changing process.
Changing from Sole Trader to Limited Company – the step-by-step process:
Step 1: Form your limited company
Step 2: Notify HMRC that you have stopped self-employment as a sole trader. (You may use this link for that).
Step 3: If you are registered for VAT, you must notify HMRC within 30 days of the change. Otherwise, you will get a penalty. You can either cancel your VAT and then register a new one or transfer your current VAT registration. You can complete this step using this link or fill in and send this form to HMRC by ordinary post.
Step 4: In case you employ people, you will also need to notify HMRC about the change.
Step 5: Complete your final tax returns as a sole trader.
Step 7: Inform all of your existing customers, suppliers, lenders, service providers and employees that you are going to start trading as a limited company.
Step 8: Update your website, terms and conditions and business stationery with your new details.
Step 9: Leverage the limited company advantages for the benefit of your business (after all you’ve changed from sole trader to a limited company for a good reason, right?).
* This article outlines the process of changing from Sole Trader to Limited Company in the UK. However, this is almost the same or very similar in other countries including Ireland and U.S.
** This article does not constitute a legal or accounting advice and is provided for general information purposes only. For a qualified advice please refer to the certified lawyer or accountant.
Further Reading: Difference Between Firm and Company