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Changing From Sole Trader to Limited Company

Published on 29th October 2018

Like many other business owners, you may have registered as a Sole Trader when starting up, and for good reason. During the early stages of your business, operating as a Sole Trader is often considered a less complicated way of structuring and organising your business. But, as your business develops and you start to bring in more revenue, you may find your current system constraining. As such, you may be considering changing from a Sole Trader to a Limited Company. Although this is usually a straightforward process, it’s a decision that needs to be made carefully, and with the support of a qualified business accountant. Therefore, in order to make an informed decision and avoid any unnecessary complications, here’s what you need to know about changing from a Sole Trader to a Limited Company.

What are the benefits of changing from Sole Trader to Limited Company?

When you were starting your business, doing so as a Sole Trader may have presented itself as a low-cost way to get the ball rolling, especially since you can register as a Sole Trader business for as little as £15. However, as your business develops, continuing to use this structure in your business could become restrictive and may even start costing you more money in the long-run. As such, switching from Sole Trader to Limited Company could be more economically sound for your business’ future, but there are also many other good reasons for making this transition which should be factored into your decision, including:

1. Your company name is protected - by changing from Sole Trader to Limited Company you will be required to register with Companies House, which will grant the name of your business legal protection. As such, no one else has the legal right to use the same for their business, or anything similar which would be likely to affect your brand and cause confusion among customers.

2. Less tax on your earnings - As a Sole Trader, your business is charged Income Tax based on how much revenue you’re generating. As your business’ revenue increases, your tax liabilities increase as well, making it uneconomical to continue as a Sole Trader. For example, according to the 2017/18 tax brackets, Sole Traders operating in England, Wales and Northern Ireland were taxed as below:

20% - Revenue up to £34,500

40% - Revenue between £34,501 - £150,000

45% - Revenue in excess of £150,000

However, Limited Companies are, instead, charged Corporation Tax on their profits, which currently stands at 19%. Plus, it’s also worth noting that the Government has also expressed that it’s considering reducing this to 17% from April 2020. As such, changing from a Sole Trader to a Limited Company could see your business’ tax liabilities reduced.

3. Limited Liability - By making the transition to a Limited Company, your exposure to any financial losses is reduced - giving you additional protection in the event of insolvency.

4. Prestige - Another important factor to consider is that many agencies prefer making contracts with Limited Companies as opposed to Sole Traders, regardless of how well your business may be performing financially. This is mainly because operating as a Limited Company is often perceived as being more reliable and professional.

5. Greater access to business finance - In addition, many finance providers prefer lending to Limited Companies. This is mainly on account of factors such as the Customer Credit Act (CCA) which increases the paperwork and regulatory requirements that lenders must abide by.

Are you operating as a Sole Trader or Limited Company? Need help sourcing a suitable finance solution for your business? Apply for Business Finance or learn more about how your business could benefit.

Becoming a Limited Company from Sole Trader

Although changing from Sole Trader to Limited Company is often considered a straightforward process, it always pays to be prepared going forward so you know what to expect. For one, there may be a lot of paperwork involved, so you may require the expertise of a qualified business accountant or an agency specialising in this area. Nevertheless, the first step to take is informing customers, suppliers, employees and creditors (if any) of your intention to become a Limited Company. Plus, if you haven’t already, you should also set up a current account for your business as well, in compliance with the additional accounting requirements. From here, you can proceed with registering your business as a Limited Company with HMRC, whom will require details such as

  • The name of your company
  • Your trading address
  • The name of at least one of your directors
  • Details of company shares (and the name of at least one shareholder)
  • Your business’ Standard Industrial Classification (SIC) Code.

In addition, you must also register for Corporation Tax with HMRC within 3 months of trading as a Limited Company, or risk incurring a fine. Finally, if your business is already VAT registered, it’s also worth noting that you may be required to cancel your existing VAT code and re-register your business within 30 days of trading as a Limited Company.

What finance opportunities are available to Limited Companies?

Regardless of whether you’re a Sole Trader or a Limited Company, you could still qualify for Business Finance all the same. However, transitioning to a Limited Company does encourage lenders to look at your request more favourably (as opposed to an application made by a Sole Trader). Nevertheless, applying for business finance from a traditional financial institution can still prove challenging. Fortunately, the Alternative Finance industry is unleashing a new generation of business finance products and lenders upon the UK lending landscape, making it possible for more and more businesses to gain access to the funds they need in order to succeed.

So, whether you’re a Sole Trader or a Limited Company, just some of the products you might be eligible for include Secured and Unsecured Business Loans, Invoice Factoring, Invoice Discounting, Commercial Mortgages, Bridging Loans, Hire Purchase, Overdraft Replacement or Merchant Cash Advance. All you need to do now source the most suitable business finance product for how your business operates - which is where speaking with a qualified business finance professional could help.

Does your Limited Company need finance?

At every stage in your business’ development, making sure that you have access to sufficient amounts of capital to support growth and maintain day-to-day operations is crucial. However, if you’re considering changing from Sole Trader to Limited Company, making the transition could enable your request to be looked upon more favourably. Nevertheless, sourcing a suitable finance solution to enable you to achieve your goals could still prove challenging all the same. However, that’s where we can help.

At Rangewell, we’re an Access to Finance specialist who has mapped over 400 lenders to offer you a comprehensive overview of more than 23,000 business finance products. We are completely independent so you can be sure that you get the most appropriate products for your business and no-one else's. Our services are free to use and we’ll also guide you through the application process from start to finish. So if you’re looking to raise capital in support of your business’ development and don’t want just a list of lenders offering unsuitable products, apply for Business Finance today or find out more with Rangewell.


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David Harrison

David Harrison

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