When should I change from sole trader to limited company?
Many businesses begin life as sole traders by default: it’s just how many people start out. But when is it time to make the change from sole trader to a limited company? With more personal responsibility on you when it comes to factors such as losses and tax, changing to a limited company structure might be the best option for you and your business.
Limited company formation is a good route for most new businesses. This is because it’s a structure that provides some protection for you as an individual. According to gov.uk, the definition of a private limited company can be understood as something which is a legal entity in its own right and is separate from the people who own it. A limited company is also considered separate from your own personal finances. Owners are given limited liability and are only liable for debts up to the value of what they have invested.
There are certainly some considerable advantages in changing from sole trader to limited company, and a change of structure could definitely pay off in the long run. Let’s take a look at why you might want to make the change to sole trader sooner rather than later.
Protect your business name
One excellent advantage of forming a limited company is that you can secure the name you’d like for your company. This is particularly handy if you want to create a website, produce business cards or get a logo designed. Protecting that name puts you safely in the knowledge that no one else is going to take it and form a company using a name that is similar – which is really useful if you’d like to grow and become recognised as a brand.
Become more tax-efficient
The difficult thing about being a sole trader is that you face being taxed on your profits. However, this is only once you earn more than £12,500 a year. After you reach this point you might find yourself paying up to 45% of your overall income if you earn over £150,000. If you change to a limited company setup, there are a lot more benefits to be had in terms of paying less in personal taxation. As a limited company, you will be liable to pay corporation tax for any profits that you make. This is currently set at 19%. Additionally, you can pay yourself separately in dividends, an option you cannot take as a sole trader, allowing you to keep more of your earnings. You can find out more about limited company tax here.
Limit your liability
Another very important benefit to note is that you will no longer be personally liable for debts that your company might incur. This means you won’t find yourself out of pocket if things go wrong, giving you that extra layer of protection. Remember, the success of your business is not always totally dependent on your efforts. This kind of insulation is not something a sole trader gets to benefit from. This means it is worth bearing in mind when deciding how you want to structure your business operations.
Boost your professional status and attract new clients
Generally speaking, having “Ltd” on the end of your company name looks a lot more professional to customers. It shows potential clients that you take yourself and what you do seriously. Being able to call yourself a private limited company gives off a sense of prestige. In every part of your business, it’s important to convey a sense of confidence in yourself. That, in turn, will make customers confident in you.
Take your business to the next level
When you change from sole trader to limited company, the opportunities for growth start to truly emerge. You’ll have a protected business name, added professionalism and more cash for you to keep. This means a limited company structure is undoubtedly going to give you and your business the necessary tools to thrive.
Get your limited company set up with ease by checking out our company formation packages. Or, if you are interested in learning more about how to set up a limited company and what’s involved, keep browsing our knowledge base.