Changing From Sole Trader to Limited Company

Changing From Sole Trader to Limited Company

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 6: Within 3 months of starting to trade through your company, you must register with HMRC for Corporation Tax. You can do this online.

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?).

 

Notes:

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.

We’ll be glad to hear your thoughts and happy to answer your questions!
Please share them in the comments section below for us and our audience to read and benefit!

Difference Between Firm and Company

Difference Between Firm and Company

Difference between firm and company?

This question arises quite often. It even may cause an earnest confusion.

Usually, people encounter this question during pre-incorporation stage. And then they need to figure out the difference between firm and company. This is important to decide on further steps.

You have a great business idea. You are motivated. You just can’t wait to start bringing it to the life.

And then you encounter this kind of question.

It is hard to answer this question if you are not a lawyer. Or experienced business professional. This may even pull you back. Decrease your level of motivation.

Well, it’s easy to get an advice from a certified lawyer. But is it worth it?

You do not have to hire a lawyer so early, right? Not for every occasion.

Professional legal advice is expensive. And it’s probably not necessary here.

Yet, it is important to be always clear with your legal affairs. Everything related to law requires a responsible attitude. Poor legal decisions may cause financial loss. They even may harm your business. So, you anyways need to figure this out.

Well, that’s why we are here!

We’ll try to guide you through this question in a detailed manner.

 

So, what is the difference between firm and company?

 

While being not a big deal this question must be examined from two main perspectives:

 

  1. Legal perspective and;
  2. Linguistic perspective.

 

We agree that this is not a purely legal issue. However, the difference between firm and company first must be analyzed from legal perspective.

Linguistic part of it may actually shed more light. But it is unlikely to carry any monetary value for you. It also won’t result in any serious consequences.

It is the law that sets out the criteria and grounds for us to name certain things in certain ways. And it is again the law that stipulates how those things are dealt with in a real world.

So, what is the firm and what is the company from a legal perspective?

 

Difference Between Firm And Company From Legal Perspective

 

As you may know there are certain levels of law. There is a national law and international law. National law is often limited to certain country boundaries. International law has an international coverage.

National laws govern corporate structures. There is no universal international legislation governing this matter on a global scale.

To make a difference between firm and company, we must refer to the particular country (or state) legislation.

However, we have never encountered a firm being anything different than a company in any jurisdiction.

In most of the countries, including the United Kingdom, Continental European Countries and the United States, there are legal structures for running a business. That’s what we call a company, firm etc.

Most popular legal structures are limited companies, partnerships, public companies and corporations. Variety of business structures depends on country.

But there is no such business structure as firm.

None of major English-speaking jurisdictions consider firm as a business structure (e.g. Companies Act 2006 in UK and California Corporations Code do not define a firm as a separate legal structure).

So, from a legal perspective there is no such thing as a firm. At least as a separate business structure. But there is such thing as a company.

Both documents above refer to all business structures as companies.

The same is about Irish Companies Act 2014 and Australian Corporations Act 2001.

 

Not even a mention of firms in legislation?

 

Some of the documents may mention “firms” in their provisions. UK Companies Act 2006 and Australian Corporations Act 2001 mention “firms” in their texts.

However, they do not consider firms as separate business structures.

Often, the terms “firm” and “company” are interchangeable in legislation. This happens when legislator refers to specific types of companies. These are firms in their traditional meaning (such as law firms, accounting firms etc.).

Thus, firms and companies are not different from a legal perspective. Legally, there is no such a term as “firm”. Only company.

But, we know that firms do exist. We also know that they differ from companies.

But what is this difference in the end?

Seems like the major difference between firm and company lies in the linguistics.

Let’s see what is the firm and what is the company from a linguistic perspective.

 

Difference Between Firms And Companies From Linguistic Perspective

 

To answer this question, we refer to the most authoritative online dictionaries.

Most prominent online dictionaries such as Cambridge Dictionary and the Dictionary by Farlex define firm just like as a company or business.

Similarly, Merriem Webster Dictionary, TheFreedictionary.com, YourDictionary.com and Findlaw.com define firm as a business entity. They also highlight its main element – partnership nature. A company is called a firm when it is a partnership of two or more persons.

So from the linguistic perspective, there is a clear difference between firm and company.

Dictionaries make a difference when a company is a partnership. And then they call it a firm.

From a linguistic point of view company is a broader notion of business entity. The notion of “company” embraces the notion of “firm”.

In simple words, all business entities are usually referred as companies. Only those of companies that are partnerships are usually referred as firms.

In practice people often call certain types of business entities firms.

This takes its roots from traditions and customs. Traditionally, law firms and accounting practices often were established in the form of partnerships.

Today, people still call them firms. They do not pay too much attention to actual business structures. While they may be different.

 

Summary

 

Thus, there is a soft difference between two notions from the legal perspective. In contrary there is more explicit and straightforward distinction from the linguistics side.

It all depends on the perspective. If you approach this question from a legal perspective, there is only company. No firm as a business entity.

Unlike the legal point of view, if you approach this question from a linguistic perspective, there are both: firms and companies. But they are similar.

In practice though, there is no difference between firms and companies. It is okay to call some types of companies firms. That’s it.

Firms and companies are the same thing in nature.

Difference between them is basically in how you decide to make it. You won’t tangle anyone if you would say company instead of a firm or vice versa.

Likewise, you won’t be able to mess up with your company registration here. There is no available business structure called firm.

So, no worries. 🙂

 

Further Reading: Changing From Sole Trader to Limited Company

We’ll be glad to hear your thoughts!
Please share them in the comments section below for us and our audience to read and benefit!

Pin It on Pinterest