Going from Sole Trader to Limited Company
There are a number of reasons why you may want to change your business structure from being a sole trader to a limited company, for example, you may have grown your business to the point where it makes sense to have additional investors (shareholders), or your earnings are now at a level where it can become more tax efficient. If you are not familiar with the process of changing your business structure, this article will help you understand what is involved.
Setting up as a sole trader is very common in the UK. It is easy to set up and is generally the way many businesses choose to start out, but if you want to expand your business you may find that you will benefit from becoming established.
Why become a limited company?
Limited companies are often seen as being less risky than sole traders. They offer greater protection against creditors and other liabilities and have more opportunities of securing funding, however, there are also disadvantages including:-
- A limited company is it’s own legal entity and is therefore subject to different tax rules, it is more complex to run and has more reporting requirements (costing more time and money)
- It is more difficult to close down a limited company, than it is a sole trader
- It can be more complex to work out how to pay yourself via a ltd company
When’s the right time to form a limited company?
There are a number of reasons you might choose to transfer to a limited company, one key turning point for a majority of businesses will be earnings, as they want to make use of the income tax benefits of paying a mix of PAYE and dividends, but some businesses feel that having a ltd status is more professional and decide to take the step much sooner.
What else do I need to consider transferring from a sole trader to limited company?
- Your business may be eligible for a higher amount of funding through banks and other financial institutions.
- You’re not personally liable if your business makes a loss or if someone makes a claim against it
- Your personal tax is based on the salary and dividends you draw from your company
- You can protect your business name
- It can be easier to attract investors
In summary, knowing your options is a great way to find the best business structure for your business. There are many considerations, but in the end, it’s important to think about your overall business needs and goals.
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