17 September, 2021
The thought of becoming a limited company may seem daunting and present you with challenges you’re unfamiliar with, but it offers you and your business the opportunity to reach heights that may have been unobtainable before.
Making that shift to a limited company is a big step for any business owner or sole trader, but comes with rewards, and allows you and your business to flourish.
Setting up a limited company protects you by distinguishing you and your business as two separate entities, while still allowing you to retain full control. That means that should your business run into difficulties, the business - not you - will be responsible for any debts. That peace of mind alone is by far the greatest reason to consider the switch from sole trader to a limited company.
You’re free to appoint additional shareholders, which can be family, who will have limited liability.
Tax rates for limited companies tend to be more favourable, and if you employ staff, paying them via Pay As You Earn (PAYE) is easier.
For a majority of the day-to-day operations of the business, when you make the change you’ll see no impact, and it will be business as usual. However, the tax benefits and the ability to separate yourself from the business are two of the biggest benefits.
There are two main steps involved in becoming a limited company:
1. Register the business with Companies House at https://www.gov.uk/limited-company-formation - this step itself has a number of stages that are simple and easy to follow, however, it can take several hours.
2. Let HMRC know - this may be something your accountant (if you have one) will be able to do on your behalf.
Yes, absolutely, so long as you earn over the £12,500 tax allowance. Nobody likes administrative tasks, but it’s a small price to pay to allow your business to operate without the risk of losing your assets in the event the business experiences financial difficulties.
The tax benefits and ability to pay employees via PAYE also make your life easier and allow you to get on with running your business.
As a sole trader, it can be difficult to raise capital in order to grow the business. Some companies are also known not to deal with sole traders.
Sole traders are also not eligible for statutory maternity leave, holiday, or sick leave.
Before making the decision to become a limited company, there are a number of factors you should consider:
Once you’ve made the decision and taken the steps to register your company, what else do you need to do during those first few days, weeks, and months?
You’ll need to keep your personal finances and your business’s finances separate, so set up a business bank account as soon as possible. Don’t just settle for the same bank as the one you already hold your personal account with, shop around to make sure you’re getting the best service for your needs.
To set this up it’s likely you’ll need a form of ID and your certificate of incorporation.
Business insurance is a must, to cover you in the event of something unexpected happening, such as loss or damage. Depending on the type of business you run, there are different levels of cover you will need, which can include:
You should thoroughly understand which sort of insurance your business needs to avoid unnecessary costs and headaches down the line.
Getting your name out there is an important step to finding new customers and growing your business. The first thing people do when considering making a purchase or hire is search for a website - and a professional-looking site with strong testimonials will go a long way to cementing your business as one that is trustworthy.
There will be administrative tasks that need to be completed in the short term, such as registering for corporation tax within the first three months, and alerting HMRC if you pay any employees.
HMRC will automatically issue your business with a UTR (Unique Taxpayer Reference), which is used to identify your business for tax purposes. If your company expects a turnover of more than £85,000 in thirty days you will also need to register for VAT.
Don’t throw away any correspondence you receive from Companies House and HMRC. If you’re unsure about whether or not to hold onto something, double-check.
Make sure you keep up-to-date financial records, ensuring you don’t miss or skip anything. As the director of a limited company, it’s your responsibility that all records are correct, so you pay the right amount of corporation tax.
Put down everything you do in writing. That includes any terms and conditions, policies, or shareholder agreements.
There are a number of important dates to be aware of, including:
If your finances allow for it, consider hiring an accountant. Administrative work can be lengthy, so bringing someone new into the team can help reduce the pressure on you. This can be another shareholder, who could potentially be a family member.
This is especially important if there are multiple shareholders. If things are looking good - or bad - then be honest and open with everyone who has an interest in the business.
You’re now making decisions for the company, and not just yourself. Remember, in the event the company fails you’ll no longer be at risk of being financially accountable. That being said, this is a business you’ve been running for some time, and you need to have the bigger picture in mind when making decisions.
With the change in your company status comes a change in job title for you to Director. However, the day-to-day operations of keeping customers and clients happy shouldn’t change, so continue using all your skills, knowledge and experience to deliver at the highest standard.
Give your company that extra bit of oomph by having your registered address be in the heart of London. Check out our virtual office services for more information.