Becoming a sole trader is excellent, and so is a limited company. Each of these business structures has its benefits and cons. Comparatively, a limited company formation will bring you more benefits than others. If you have started as a sole trader, you can change into a limited company.
Before knowing why to switch, let’s check what both business models are.
Sole traders and limited companies are some significant company structures across the UK. Most startups and small and medium-sized businesses consider opting for this structure. However, you must know there is a substantial difference between the two.
A sole trader is a business model wherein a single person owns and operates it. This person will control all the aspects of the business. Therefore, this person will compare the everyday decisions and keep the personal and funding responsibilities in check.
A limited company has shareholders. It is a prominent business model where more than one person is involved. Since it is about shareholders, the number of people can vary. While there can be a person who owns all the company shares, multiple people can be willing to invest in the company. Depending on their investments, they will get a specific percentage share.
All the limited company shareholders will have some role in the company. They will be responsible for taking care of the daily activities and contributing to the company’s management and running. However, not every shareholder will have the most critical roles to play. Some of these roles will be taken care of by the director only.
There is no doubt that the sole trader business structure is extremely important and beneficial. However, after some time, you may want business growth.
Switching from sole trader to a limited company model can bring a wide range of benefits to the business. Some of the common reasons to make the switch include the following:
One of the significant benefits of a limited company is that you will get a legal identity. Since the business has a legal identity, there will be a liability for the property to get into debt. All these financial liabilities will be imposed on the company, not the owner. When it is about a sole trader, all the debts will be registered under the owner’s name and not a business.
Full liability of the business can also offer complete security to the company. You don’t have to worry about your assets to cover any loan default. Moreover, when you want to buy or own a property, this liability can also help. It will protect you from stamp duty tax charges as none of the uncalled scenarios will affect the owner’s name.
While sole traders are a great business model, there is a lack of professionalism. Comparatively, the limited company will help you establish a more positive reputation in the market. Since it will be an established company, it will help you get clarity and credibility in the market.
When you’re a sole trader, it will be pretty difficult for you to acquire a new client. However, when you reach out to a potential business prospect, the chance of securing them as a client increases. Therefore, it can bring more business, thereby boosting your profits. It will also allow the growth of business with an increased client base.
Limited companies will likely have better financial backing than sole trader companies. Every limited company has its own identity. Since they are registered, it becomes easier for them to get loans and get business. It will also be easier for these companies to drive investments.
Your company comes off as a professional asset in front of the investors. Most investors are more likely to invest in a business than a person. As a sole trader, you can only apply for personal loans, and applying for a business loan can often be challenging for sole traders.
Moreover, one of the main reasons why they get better financial backing is because of the shares. As a limited company, you will have the flexibility to sell or even assign shares for the company. Every investor can get something significant from the company.
If you ever have plans to sell your business in the long run, you should consider switching to a limited company. Having a sole trader business will not bring you the flexibility of selling the business. Well, selling a profitable company can help you earn a lot of money.
Selling a limited company is a long-term goal that businesses may adopt. You can legally transfer the shares to the new owner when you sell the limited company. Moreover, if you want any family member to take over the business, you can quickly transfer the shares. Nonetheless, this must be done legally as per the law. Transfer of shares and selling the company becomes easier when you have a limited company than being a sole trader.
Comparatively, limited companies will get better tax benefits than sole traders. The sole traders will have to take care of personal tax rates. However, limited companies will need to pay fewer taxes.
The limited companies can also claim numerous allowable expenses, which can help to reduce taxes. Some expenses that can be claimed include broadband and mobile charges, business insurance policies, fixed asset and equipment, accountancy fees, travel costs and more.
It can be claimed if any expense is made only for business purposes.
Switching from a sole trader to a limited company can be a big step. However, it will also mean that your business is ready for growth. When planning to change, you must weigh down the benefits of each business model. You must check with your accountant and then make a move.
Get the best advice on tax savings, accounting services, payroll, self assessment, VAT and more, whether you want to call us directly, request a call back or chat online with our experts, rest assured that we will always give you the best advice.If you have any questions, or would like to speak to us in person, please do get in touch. We're here to help.
DNS House, 382 Kenton Road,
Harrow, Middlesex, HA3 8DP
“I recently started my own company and in need of a good accountant. With my friends reference, I started dns accountancy services and I am a quite satisfied with their service. My account manager Sneha Gurudutta was always responsive and guided me a lot especially during my company early days. Keep u the good work.”
“I have been dns for the last 3 months and I am very happy with the service. My account manager Sneha Gurudutta guided me and helped me with all the major/minor steps with the account setup. The weekend support they provide is really helpful. I would definitely recommend dns to all my friends.”
“Unfortunately my son passed away without leaving any contact name of his accountant. I was able to make contact with the firm through HMRC. The staff were very prompt, caring and supportive in settling his income tax account. I was extremely impressed with the efficient caring and supportive service received from all of dns staff.”
“Been with dns Accountants for more than a year I would highly recommened their services. My account manager Sneha has been very helpful and helped with accounts and queries swiftly always! Having a good accountant means you can fully focus on your business, not worry about accounts and tax matters. Thank you dns :-)”
“I have been extremely satisfied with the service I have been receiving close to past 1 year. Very professional, transparent and helpful. Special mention of my Account Manager Minakshi Arora who made my transition very smooth and always ready to go that extra mile to support and make customer happy. Definitely recommended.”
“I've recently set up a Ltd. Company and signed up with dns for my accounting services. I've found it very good value for money and hugely helpful in terms of advice and guidance. I have a named Account Manager, Sneha Gurudutta, who keeps in contact with me and offers advice on line and on the phone... I'm really pleased with the service.”