Changing from Sole Trader to Limited Company

When it comes to deciding upon the structure of your company, there really is no easy answer. Everyone’s situation is different, and what’s right for one person might not be right for another.

There are lots of things which might influence your decision:

• The type of business you run, or are thinking of running
• Your future plans to grow the business, or not
• What level of commercial risk you will be exposed to
• What kind of administrative support you have, if any
• How you wish to be perceived by customers

The most important factor of all is your own personal preference, you may just prefer to operate through a limited company rather than as a sole trader. But in order to make that decision, you must have all the information to hand.

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Which business structure is right for me?

The four main options to consider are:

• Sole Trader: an individual
• Partnership: two or more individuals or companies
• Limited Liability Partnership (LLP)
• Limited Company

What is a limited company?

Basically, from a legal point of view, a limited company is totally separate from the person or persons who form it. What that means in real terms is that you and your fellow directors or shareholders have ‘limited liability’. Hence the term ‘limited company’.

If you choose to be a sole trader or other non-limited business, your personal assets (house, car, etc.) are potentially at risk if your company fails. But for a limited company, there is an element of protection. As long as your business is operated legally and within the terms of the Companies Act, then your personal assets are not at risk.

On paper, therefore, the option to ‘go limited’ seems obvious, but before you make that decision, you need to weigh up the pros and cons. Here are some questions which our customers have asked us over the years, along with some answers which we hope you will find useful.

How much administration is involved?

Your administrative responsibilities involve sending your annual accounts to Companies House by a fixed date each year, completing an Annual Return (a list of directors and shareholders) and submitting a tax return and accounts for Corporation Tax purposes. You will also have to complete a personal tax return.

The administration isn’t difficult or particularly time-consuming but it is easy to miss tax-saving opportunities, for example, would your business be better on the standard VAT scheme or the Flat Rate VAT Scheme, and what’s the most tax-efficient way to take money out of your company? This is where it’s useful to have a good accountant. They will also make sure you never miss a tax deadline and incur penalties.

What rate of tax do I pay as a sole trader vs limited company?

A ‘small’ company will pay the company (corporation) tax at 20% on its profits. How you will be taxed personally is dependent on the level of income that you draw from the company. This income can be structured in a tax efficient manner.

You also have the option to leave ‘reserves’ in the company to help with future growth and development (remember, with a limited company you only pay personal tax on the money you take out of the business). As a sole trader or partnership, you will be taxed on the profits of the business as they fall, not on what you have drawn from the business which is not as flexible in terms of future tax planning.

Will I earn more money as a limited company or sole trader?

If profits are above £25k per year you may well benefit from going limited; however even if your profits are lower it’s probably still worth having a chat with an accountant as they are able to find ways to make your company more tax efficient. Our Take-Home Pay Calculator will show you how much you can earn by going limited.

Is a sole trader mortgage easier to get than a limited company mortgage or loan?

Some banks look more favourably on directors of limited companies, but it really does depend on the bank. Since the advent of self-certification, it shouldn’t really matter.