When to change from a sole trader to a limited company?

One of the more common questions we are asked by our sole trader clients is when and if they should change from being a sole trader to a limited company? Is it better to be a limited company and if it is, why should they move from being a sole trader to a limited company?

When to change to a limited company?

Many businesses start out as sole traders, freelancers or contractors. As a sole trader your tax and accounting liabilities and the things you need to report, are much more straightforward than limited companies. But, as you become more successful and your income and revenues grow, you will start to be liable for more tax, it can then become more tax efficient to be a limited company. A simple rule often quoted is that when your profits as a sole trader exceed £30,000 per year, your potential tax savings are larger than the costs of running a limited company, making it an obvious choice to make. However, there are other reasons that may make you want to think about changing sooner.

Why should I change to a limited company, is it better than being a sole trader?

As we have said being a sole trader does have some benefits, the main being that there is a lot less admin and record keeping requirements. You also don’t have to pay corporation tax or file company accounts. Plus, you retain all the profits after you have paid tax having just submitted your annual self-assessment return.

However, as a sole trader you are also completely liable for anything regarding your company. You are personally responsible for any losses made, and importantly, if anyone makes a claim against you. If anything happens, your personal assets, from your car to your house, may be recovered against any debts. Sole traders often find it more difficult to raise finance and some bigger organisations will only work with limited companies as they view them as being “safer” due to having more legal protection. As a sole trader you also have no protection over your own business name so anyone can either copy you or trade as the same. This can make life very difficult especially for your website URL and web listings. Financially sole traders will be paying 20-45% income tax whereas limited companies pat 19% corporation tax, although that is on every penny you make of profit.

The benefits of being a Limited company

As a limited company your personal liability is greatly reduced, you have much easier access to finance, meaning you can grow. You can protect your name and benefit from tax savings. It is more complex to set up a limited company as you have to file annual accounts and full tax returns to HMRC and follow PAYE for any employees. You also must register with Companies House. This all may sound scary and complex but with the right advice from a good accountant (like Farnell Clarke) it can be a relatively painless experience.

Due to other recent advances in technology, some of the other admin elements of setting yourself as a limited company now come with additional benefits. As a limited company you have to set up a business bank account in the name of your limited company and stop using the personal account you may have used as a sole trader. This though will allow you to choose one the new finance solution providers including company credit card providers who have products and services that automatically link through to your chosen cloud accounting package such as Xero. They also can make claiming and monitoring expenses and company spend on those cards much simpler through digital routes rather than keeping boxes of paper receipts.

Instead of just keeping the profits of what you do, when you set up a limited company you now will receive a director’s salary and dividends. Again, a good accountant will be able to advise you on the most tax efficient way to do this making sure you maximise all your earnings.

A good accountant can support you through the full process of setting up as a limited company. At Farnell Clarke we can advise on this, and being accounting technology experts, we can advise on the right technology and accounting software platforms for your business sector, and scale to make sure you are working as smarter and efficiently as you can. Helping you make the move from sole trader to limited company and ensuring you enjoy a much greater control over your business finances and cashflow in a far simpler way allowing you to concentrate on the day to day running and growth of your new limited company.

So, if you think this might be right for you why not call us today and let us help you take that next step.