When Should I Change From a Sole Trader to a Limited Company?

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If you’re thinking of making the change from a sole trader to a limited company, but still aren’t sure, this article will help you. Together, we’ll look at the key factors that indicate whether you should upgrade your sole trader business to a limited company.

I want to become more tax efficient and save money

Your business is doing well, and profits are up but you find yourself paying more and more tax. If you want your business to become more tax efficient you should consider becoming a limited company.

As a sole trader you can pay up to 45% income tax as well as VAT and national insurance. As a limited company you pay less tax. You must pay a flat 19% corporation tax on your profits, and (this is where the tax efficiency comes in), you can pay yourself a small salary under the threshold of national insurance, so you avoid paying income tax and national insurance, and pay yourself the rest in dividends (which have less tax than sole trader income tax).

Let’s take an example of how much you’d save on tax with total annual profit of £75,000 and you’re the sole shareholder with 0 employees. Without getting into too much detail, as a sole trader in 2021 you would pay a total of £21,803.60 in tax. This includes income tax and Class 2 & 4 NI. As a limited company you would pay a total of £19,279.19 in tax, this includes dividend tax and corporation tax. So, if you made £75,000 in profits this year, you could save a total of £2,524.41 in tax!

If you have staff, as a sole trader you still must pay them through PAYE, the same as you would in a limited company, so even if you employ someone you’ll still see the tax benefits of a limited company!

We’ve worked out that if your business is making between £15,500 and £197,500 in profits and you do not employ anyone, you will save money on tax as a limited company!

I want to protect my personal assets

You’re more than likely aware of the danger your personal assets are in if you’re a sole trader. If your business has outstanding debts like loans, credit from your suppliers, is running into trouble or you’re worried about being sued, or you just want the extra assurance that your personal belongings are safe, it’s time to form a limited company. 

If your sole trader business goes bust and you owe money to suppliers, the banks or if you get sued and don’t have the right insurances in place, you’re personally responsible to make these payments. Meaning, your personal assets may have to be sold/used to make payments if you don’t have enough capital to cover what you owe. To put this simply, you’re solely responsible for any debt your company has.

When you change your sole trader business to a limited company, it’s a separate legal entity. This gives you an extra layer of protection If your business runs into trouble, owes money, or you get sued, the debt is for your company, not your personal assets like your car, your home and any other valuables you own. They’re safe when you form a limited company.

I want to boost my professional status

Do you deal or plan to deal with larger companies? As you may know or will find out, larger companies prefer to only deal with limited companies rather than sole traders or partnerships.

This relates back to the above point about limited liability. By being a limited company, you’ll convey a sense of confidence and professionalism to those who need it. Having ‘Ltd’ at the end of your business name gives a sense of prestige. It shows clients and business partners that you are taking your business seriously.

I want to protect my business name

Your business name is important, it’s what sums up your business and It’s the first thing your customers will hear or see about your business and explains your unique take on your industry. You’ve also probably put a lot of time and effort thinking of your name and it’s special to you.

The last thing you want is someone else using your business name and reputation for their business. This can cause all kinds of trouble, even if the name is similar yours, they could influence your business and its reputation.

As a sole trader the only way to protect your name is to trademark it, however this can be time consuming and very expensive. Luckily, there is a cheaper and just as effective way you can protect your business name, by becoming a limited company

As a limited company your business name will be registered with Companies House and become legally protected. If someone else tries to register a company with the same or even a similar name as yours, Companies House will reject their application, , making sure that you are the only business with your business name.

There are clear financial, security and protection advantages in becoming a limited company. If you want to achieve any of the points we’ve discussed above, a limited company is the way forward for your business.

Our partner LegalZoom are here to help you do just that. You can form a limited company for just £1! (Normally £12) and with their simple 4 step process, it’s never been easier!

Start by searching your company name to make sure it’s available and no one else has taken it!

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