As the business grows, it is very possible that the structure you initially had for yourself may not be the best you would want to continue long-term. Actually, most small business owners start life as a sole trader because setting up one is exceptionally easy. However, once you realize that changing to a limited company will let you have more benefits. But this intimidates one, for you’ll soon enough learn when to do it and how.
We will cover every detail, including when to make replacements, guiding you through your business transition and answering all the most commonly asked questions you’ll have along the way.
Why to Change from Sole Trader to Limited Company?
Based on the measure of size, growth, or objective of a business, it can be probable that a sole proprietorship or private limited company you should opted for. So now, let’s compare the two:
Sole Proprietorship
- Ease:
It can promptly be set up with lesser documents.
- Ownership of Single Person:
It is owned by one person that is, a single individual, and hence the person wholly holds all the decision-making control and profit.
- Unchanged Liability:
You would liable to pay all the debts of the business. You would highly expose your assets.
- More Taxes:
When you earn profit then you have to pay taxes also because whatever is earned, is treated as a personal income.
Private Limited Company
- Limited Liability:
Your personal assets are saved and the company is liable for its debts.
- Tax Efficiency:
You are at a better rate of tax and even a better extraction of the profits through dividends by the corporations.
- More Paperwork:
A limited company involves more paperwork and compliance compared to a sole proprietorship, such as preparing annual accounts and filing tax returns.
- Professional Look:
Yes, a private company will definitely provide a professional look, and it would attract all the big clients and more excellent business dealings.
Generally sole proprietor is very apt for small businesses, low profit-earning, or less risk. But if one business is growing, which requires liability protection and tax efficiency then the best option will be a limited company.
When to Change from a Sole Trader to a Company Structure?
Many factors must be considered before shifting a sole trader into a limited company for business growth. Therefore, it’s essential to select the right time to make the shift for optimal growth. Some of the critical signs that indicate it’s about time for you:
- Increasing Profits:
If the profits are soaring to great heights then now might be a good time to switch. Normally when businesses are booming such companies would enjoy lesser tax rates than sole traders. Here instead of income tax imposed on your profit you pay corporation tax which saves you some money.
- Limited liability for individuals:
You -the sole trader will take all liabilities that may arise on account of the business. In case of financial trouble for your business, your personal assets like the home are at stake. A limited company separates your personal finances from the business, hence limited liability to what you have in the company only.
- Hiring Employees:
If there is expansion along with the hiring of employees, then switching to the limited company is convenient to manage salaries and employee benefits. It also gives more of a professional look, appealing to high-end talent at large.
- Raising Investment:
To raise funds from the investors, a limited company is the best structure. One can issue shares in the company, and this goes more towards its appeal than the sole proprietorship.
- Building Credibility:
A limited company always gives out the image of a more professional company than that of a sole trader and would help win larger contracts or work with bigger clients.
How to Convert a Sole Proprietorship to a Limited Company?
You need to follow a few major steps to convert from sole trader to limited company. But the process can be completed hassle-free if approached with proper planning. This is how you should go about it:
- Choose a Company Name:
The first step of starting a new business is to select an unusually different name for your new business. Your business name should be unique, comply with local laws, and follow Companies House regulations in the UK. Choose a name that represents your brand and is easy for your clients to remember.
- Register Your Company:
The registration of a limited company will essentially be through the country’s company registrar. For instance, in the UK, it will be with Companies House. You must provide information about your directors, shareholders, and the address of your registered office at a minimum.
- Inform Your Tax Authority:
Once you have established the limited company, it is required that you inform the tax authority. For the UK, you’ll have to notify HMRC, Her Majesty’s Revenue and Customs, to register for corporation tax and, in some cases, VAT if your turnover exceeds that threshold.
- Transferring Business Assets:
All business assets that you own as a sole trader must be transferred to the new company, e.g., equipment, stock, and even business debts. You should document this properly since the company is a different legal identity from you.
- Opening a Business Bank Account:
An LLC needs to open its own bank account. You cannot utilize your personal bank account or your sole trader account as money for this company. Consider opening a new account in the name of your LLC and transferring all business funds and transactions there.
- Change the Contracts and Inform the Stakeholders:
Change all contracts and agreements with your client, suppliers, and other business partners regarding your new business structure. You may be required to update some of your contractual agreements to reflect the current details of the limited company. This would mean conducting legal and financial transactions on behalf of the company.
- Consider hiring an Accountant:
Accounting for a limited company is significantly more involved than for a sole trader, so consider hiring an accountant to assist with all of the more mundane tasks such as dealing with tax returns, payroll, and ensuring statutory compliance.
Can I Change My Bank Account from Sole Trader to Limited Company?
No, not at any stage can you transfer the sole trader bank account over to the limited company bank account. The limited company is another legal entity and sits outside of you, the human being. As such, it too needs to have a different bank account. You would, in effect be creating a new standalone business bank account that is for the limited company.
Open a new account, for this you will require the following information:
- Company registration serial number
- Documentary evidence of identification both for the directors and the shareholders.
- A proof that the company has a registered address.
It would always make sense to separate personal funds from company money such that this would follow the doctrine of law relating to a limited company.
FAQs on Whether You Can Change Your Business from Sole Trader to Limited Company
Yes, a private limited company can have more than one bank account. It is a separate legal business structure. So, it will get benefit by having current bank account.
Private limited company experiences multiple tax advantages like lower corporate tax rates, potential 100% tax exemptions under UK law and many more.
Of course you can. It is allowed in UK to be the sole owner of a limited company, A company needs at least one shareholder. So, you can easily be that one person in your limited company.
Certainly. A sole trader can operate and manage more than one business. UK government put no legal limit in this. But you need to remember that there is no legal separation between you and the businesses in that specific company.
Well, it is not advisable to use same bank account for two businesses. You should use separate bank account for different businesses. It will help you keep the record of each business’s financial health.
Conclusion
Switching into a limited company from being a sole trader is a significant decision, but it can be very helpful by offering many advantages like limited liability, tax savings, and giving a more professional image. So if your business is growing, your profits are increasing, or you plan to hire employees or find investors, then changing may become necessary.
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