Changing From Sole Trader to Limited Company

Not all self-employed people are sole traders. You need to register as a sole trader if you’ve earned more than £1,000 from your self-employed work over the course of a tax year. But when do you need to register as a limited company?

Can You Change from a Sole Trader to a Limited Company?

If you’re already registered as a sole trader, then there’s nothing stopping you from registering as a limited company. However, you should only take this step when you’re ready. Although registering as a limited company has its advantages, such as tax efficiency, greater borrowing power and better reputation and credibility, it also means more admin and more obligations.

For a start, you’ll need a business bank account, for example, for which you’ll need to pay monthly fees, although there is an increasing number of providers that offer free accounts. You’ll also have to choose a name for your company, which can be more difficult than you might think.

So when is the right time to change from sole trader to limited company?

There are advantages in switching from sole trader to limited company status

Should You Change from Being a Sole Trader to a Limited Company?

There’s no easy answer to this question. There’s no income threshold at which point it makes sense to make the change. But generally speaking, it is wise to only register as a limited company once you start to make a steady and reliable income from your sole trader business.

It’s only when your profits start taking off that:

  • You’ll be able to justify the increased costs and admin of registering as a limited company
  • You’ll really see the benefits of registering as a limited company
  • You may need to bring in directors or shareholders (you cannot enter such business arrangements as a sole trader. At this point, you’ll need to register as a limited company.)

If you’re unsure, talk to an accountant, or a financial advisor. They’ll assess your business and your projected growth, and they’ll be able to advise on a sensible next step.

Benefits and Disadvantages of Being a Sole Trader

If you’re a sole trader, there are some key advantages, such as:

  • You have full control over every aspect of your business
  • You can run things exactly how you want to
  • You’ll get full ownership of all your profits – there’ll be no shareholders to pay, and no partners to split things with

Working as a sole trader also brings a personal touch. Some people prefer to work with individuals – people they can get to know and trust. Limited companies can come across as faceless corporations, which can put certain people off. If your focus is on contractor work in your local area, working as a relatable sole trader might be your best approach to finding new customers.

But there are many downsides to working as a sole trader.

The biggest is that, should your business ever run into any trouble, you’ll have complete liability for settling all debt. You may have to dip into your personal savings or assets to settle these debts, which may put your home at risk.

Plus, you can only grow so big as a sole trader. For many people, that’s not a problem. Perhaps you’re happy working on a small- to medium-scale, with a select group of loyal customers. But if you have big ambitions for major growth, then sooner or later you’ll probably have to register as a limited company.

Benefits and Disadvantages of Being a Limited Company

When you register as a limited company, you’re declaring that your company is legally separate from the people who run it. This means that

  • Your own personal assets will always be protected, even if your business faces significant losses. (as a sole trader, you’d be personally responsible for all of this debt)
  • Many financial products will become available to you. Including business loans, credit cards, and tailored advice from your bank’s business experts
  • Trading as a limited company can bring more prestige than working as a sole trader. You’ll look like a true professional, which could be exactly what you need to attract the big clients who’ll secure your long-term success.

So what are the downsides of registering as a limited company?

Only that registering brings a lot more obligations and responsibilities. That means a lot more work, which means more costs. You may need to bring in extra staff to assist you with the increased admin, so that you’ll be free to focus on your core business activities. This is why you should only register as a limited company when you’re ready to do so.

Other Things to Consider

Whether you register as a sole trader or as a limited company, it’s essential to get yourself insured. Insurance can cover you for almost every conceivable scenario, from legal defence to damage to your property. It ensures that, no matter what happens, you’ll be able to focus entirely on your work and your growth. You’ll get total peace of mind that should anything ever go wrong, you’ll be able to handle it.

Recognising that factors such as flexibility, cost and being in control are of utmost importance to any sole trader, we are committed to making the most essential commercial insurance products accessible and available to them on demand, which means they are in total control of their own policies and costs by paying for exactly what they need, when they need it. With policies starting from just 35p a day and an online quote that takes just 60 seconds of your time, we have you covered. Head here to get your free quote today.