Switching from being a Sole Trader to a Limited Company has advantages and disadvantages. While you should ask your accountant to help you decide if you should switch, this article will give you something to think about.
Benefits of changing from a Sole Trader to a Limited Company
Limited Company owners have more protections than Sole Traders
As the name implies, owners of Limited Companies have limited liabilities if the company gets in trouble. For example, if a Limited Company falls into debt, it is the business that needs to pay it, not the owner. As a Sole Trader, the debt would be yours and you would need to pay it yourself.
Limited Companies can attract bigger business than Sole Traders
Many larger companies will only deal with Limited Companies and not Sole Traders because Sole Traders are seen as being too risky to work with.
Limited Companies can get more tax reliefs than Sole Traders
Limited Companies can claim tax reliefs on more costs than can Sole Traders, e.g. your limited company can pay for your food if you are working away from home or office, whereas the options in these situations are more limited for Sole Traders.
Limited Companies can get investment through selling shares
Limited Companies have more options for finding investment than Sole Traders. The most obvious and easiest way is that you can raise money for your business by selling shares.
Limited Companies can save tax over Sole Traders
Once you are earning profits of around £50,000 and above as a Sole Trader you should consider switching to a Limited Company in order to make tax savings due to corporation tax being lower than income tax plus National Insurance Contributions.
Disadvantages of changing from a Sole Trader to a Limited Company
Taking the money you earn as a Limited Company is more complicated after you switch from being a Sole Trader
When you are a Sole Trader, your business’s profits are automatically your income and you can take it whenever you want to. As the owner and employee of a Limited Company you must take money out as a salary and/or dividends on the shares you own. You can also claim expenses from your Limited Company.
Finances become more complicated once you switch from Sole Trader to Limited Company
It’s not just taking money out of the business that becomes more complicated when you switch from a Sole Trader to a Limited Company. Making records of your finances also becomes more complicated.
As a Limited Company you need to file an annual return, a corporation tax return, and a set of accounts. Also, as a director of a Limited Company, you still need to file an annual personal tax return.
As a Limited Company your finances are a matter of public interest
When you switch from a Sole Trader to a Limited Company your business’s finances become public domain and anybody is able to check your accounts and annual return. Your office address will also be public, which could be a problem if you run your business from home – however, this problem can be fixed with a registered address service.
You have more responsibilities when you switch from Sole Trader to Limited Company
As the director of a Limited Company you have certain legal responsibilities such as keeping your business’s assets safe.
Getting help switching from Sole Trader to Limited Company
Pearl Accountants makes it quick and easy to switch from a Sole Trader to a Limited Company. We include company formations in our all-inclusive accountancy packages.
Shoaib Aslam is the co-founder of Pearl Chartered Accountants, a UK-based chartered accountancy firm that has multiple locations across London. They are experts in helping startups and established businesses with all aspects of growth, strategy, scaling up, accounting and tax planning.