The Full Guide To Changing From A Sole Trader To A Limited Company

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Your business is your number one priority, and it’s important that every part of it is set up in the best way to benefit you. 

But businesses aren’t static entities. They grow and change over time as you do – which means that the way you initially set up your company might not be working for you right now. 

This is a common problem that many sole traders face. Being a sole trader is great, but there comes a point that being a limited company instead might bring you bigger benefits and offers. 

The good news is that it is a relatively easy change to make, which we’ll reveal in this complete guide to changing from a sole trader to a limited company. 

Sole trader vs limited company

Before we jump into the nitty-gritty details, let us clarify and outline exactly what a sole trader and a limited company are. Fundamentally, they are both company structure types favoured by start-ups and SMBs in the UK, but there are significant differences between them. 

A sole trader is a business that’s owned and operated by a single person. Every aspect of the company is controlled by this person, which doesn’t just mean the everyday decisions but also the funding and personal liability. 

In contrast, a limited company is a registered business owned by shareholders. This could be a single person, who owns 100% of the shares, or multiple people who invest into the company and own as much as their share percentage. 

Although limited companies have shareholders, not every shareholder will be involved in the day-to-day running and management of the company. This will be left to the director. 

What are the benefits of being a limited company?

Now we’ve explained the difference between a sole trader and a limited company, now it’s time to talk about why you might want to change your company structure. 

Basically, limited companies have more benefits and security on offer than being a sole trader. These include: 

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1. Full liability

A limited company is its own legal entity. That means that it can have debts and property in the companies name, rather than the owner, which would be the case in a sole tradership. 

This offers a level of security, as in the event of anything going wrong, the company would be liable for its debts – not you. You don’t have to worry about your own personal assets being offered up to cover any worst-case scenarios with your business. 

In the case of buying or owning property, this will also benefit you from greater taxation or stamp duty charges as it won’t be in your name. 

2. Increased tax efficiency 

One of the main benefits of being a limited company is the increased tax efficiency when compared to sole traders.

Tax rates for limited companies are often better and more favorable than personal tax rates that a sole trader is responsible for, meaning you’ll be paying less tax. 

In addition, limited companies are able to claim a great number of allowable expenses, reducing your tax bill even further. These expenses can cover almost anything related to the running and operation of your business, including: 

  • Travel costs;
  • Everyday milage if you have to travel between clients or drive as part of your job;
  • Accountancy fees;
  • Bank or other financial charges, such as interest on bank loans;
  • Business insurance policies;
  • Charitable donations;
  • Certain childcare costs and expenses;
  • Christmas parties, staff events or even staff gifts;
  • Fixed assets and equipment;
  • Mobile, landline or broadband expenses;
  • And much more. 

The rule here is that if the expense is “wholly, exclusively, and necessary” for business purposes, then you can claim. If you’re ever unsure, speak to your accountant for more advice. 

3. Increased professionalism 

A limited company gives off a more professional, established, and serious company than a sole trader. This is one of the more superficial benefits, but it can have a big impact on your clientele. 

For example, if you’re trying to secure a new contract or win a potential client over, you will have more weight and leverage on your side by being a limited company. This could mean more business in through your door, giving your profits a boost. 

4. Increased financial backing 

Because a limited company is its own legal entity, it can be easier to secure business loans and investments for your company than being a sole trader. 

This is partly because your company may seem more professional and a viable option as a limited company, rather than issuing a personal loan to you as an individual to use on the business. 

However, one of the other reasons is that a limited company has shares. This means that you can sell and assign shares in your company, offering investors a slice of the cake. You can find out more about assigning shares in a limited company here.  

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5. Limited companies are easier to sell

This might not be a consideration for most of you, particularly if you’re just starting or building your business. However, it’s worth pointing out as a long-term benefit. 

Limited companies are a lot easier to sell than sole traderships, as you can just transfer your shares over to the new owner. If you’re planning on leaving your company to a family member when you retire, this is also achievable as a limited company. 

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Should I change? The benefits of staying a sole trader 

Sole traders make up around 60% of small businesses in the UK. And when you look at the benefits of being a sole trader, it’s not hard to see why. So to give you the full pros and cons to see all sides here, these are the top reasons why you might want to remain to be a sole trader. 

1. There’s a lot less paperwork 

In general, sole traders don’t have to submit as many forms and returns as limited companies need to. Now, you’ll still be eligible for submitting your self-assessments and paying national insurance each year, but that’s about it for sole trader legal obligations.  

As a limited company, this changes. You’ll be responsible for completing more forms, which means a lot more paperwork and red hoops to jump through. 

2. You’re in full control 

As a sole trader, you are the sole owner. You call the shots, you make the decisions and you drive the success of your business. 

As a limited company, this can change as your company ownership is decided on a share basis. Unless you retain 100% of the shares, some of the big decisions will need to be run by your shareholders to make sure that all are in agreement before you can act. 

3. There’s greater flexibility 

Flexibility to adapt to rapidly changing industries is one of the best attributes of being a sole trader.

Similar to the above point, being the sole owner of a business gives you greater room to grow, change and react. If there are big changes happening in your market, you can alter your strategy instantly rather than waiting for a board to approve it. 

If you want more wiggle room in the pricing or the hours you work, you can do it. You’re the boss here. 

4. Can be more friendly 

We talked about how a limited company can appear more professional to clients. Although this is true, it’s worth talking about the flip side to this. 

Sole traders can be seen as a more friendly option to limited companies as it means that clients are dealing with one person, not a company. There’s a hometown feel to this that you’ll always be on hand to talk to and reassure your customers and offer a personal touch that just isn’t available for bigger companies. 

5. Your accountacy costs will be lower

As a sole trader, you have less paperwork to complete. Your accountancy needs are a lot simpler as you don’t have to worry about anything like Annual Accounts or Corporation Tax Returns. This means that your accountancy costs will be a lot lower. 

In most cases, you could even manage it all yourself with the help of bookkeeping software. 

And to get you started on the right path, we’ve got the best self-employed accounting software that you can use here. 

Wondering how much your accounting will cost you as a limited company? Find out all the details in our guide to the average accountancy costs for a limited company. 

6. The profits will be all yours 

By not having any shareholders to deal with as a sole trader, all the profits that you make will be yours to keep. 

However, it is worth noting that in the long run, you may end up losing more to tax as a sole trader – as this is the income that you’re taxed on. If you’re a limited company, you could pay yourself a regular wage and enjoy increased tax deals to lower this cost. 

7. You have more privacy 

When you register as a limited company, you need to submit a registered business address that will remain on public record by the Companies House. 

If you’re a private person and would rather keep this information private, then you may struggle to register as a limited company. However, to get around this problem you could use an alternative business address, including a paid one managed by formation agencies. 

How to change from a sole trader to a limited company 

The process of changing from a sole trader to a limited company is not that difficult but you should be aware of a few key things.

Okay, so now you’ve made up your mind – how do you actually change from a sole trader to a limited company? 

The good news is that this process is pretty simple. It just takes some time and a little bit of paperwork. To register as a limited company from a sole tradership, you need to: 

  1. Form your limited company following the usual process. We’ve got a whole guide on how to form a limited company here. 
  2. Get in touch with HMRC to inform them of the change of your company structure.
  3. De-register as self-employed and ensure that your class 2 National Insurance payments are stopped. 
  4. Let your accountant know of the changes and ensure that you’re now submitting the correct paperwork and returns as a limited company. 

The steps themselves are pretty simple, but there are a lot of forms and double-checking to make sure that everything you fill out is correct and accurate.

There’s nothing stopping you from doing this yourself, but for peace of mind and a complete changeover in just a few hours, we’d always recommend using a company formation agent. 

Company formation agents are specialists that set up and register companies on your behalf, saving you time, stress, effort, and paperwork.

They can also provide a number of extra services, including businesses addresses to save your privacy when working from home and give you a more official address to use for your business. 

Find the best company formation agent for your business here. 

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What are the responsibilities of a limited company? 

After you’ve changed from a sole trader to a limited company, it’s important that you take note of the main differences between the two company formation types  – and ensure that you’re adhering to your new responsibilities. 

As a limited company, you’ll be expected to: 

  • Register for Corporation Tax with the HMRC. If you have employees, you’ll also need to register for PAYE and tell the HMCR that you are an employer. 
  • File annual conformation statements to the Companies House. This is used to confirm and update your company data every 12 months. 
  • Submit annual accounts at the end of every financial year, providing a full overview of your trading activity and finances.
  • Submit your company tax return every 12 months to the HMCR. 
  • Pay your corporation tax, which applies to all taxable income and must be paid at the end of every financial year. 

If you don’t already have an accountant, we’d strongly recommend that you get in touch with one to help make sure that you submit and adhere to all of these responsibilities on time and accurately. 

Failure to do so could result in hefty fines and penalties, which no one needs to deal with. 

Moving your business forward

Changing from a sole trader to a limited company is a big step and can mean a lot more growth for your company. To make sure that the change goes as smoothly as possible, don’t forget to check out our reviews of the best company formation agents, accountancy software, and online accountants to make sure you always get the best. 

No matter what stage your business is at, at Business4Beginners we’re here to help with the latest news, tips, and ideas to keep your business on top.

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Business4Beginners has been advising new businesses owners since 2013. The founder, Paul Bryant, has created, grown and sold several successful businesses and remains the editor and fact-checker of all content published on the site.
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