Sole Trader to Limited Company: 5 reasons it might be time to make the transition

Changing your business status from a sole trader to a limited company is a significant step for any professional - and it can be challenging to pinpoint exactly when the time is right. 

There's no one-size-fits-all when it comes to working for yourself. Being your own boss could mean you're a seasoned contractor, freelancer or even in sole possession of your retail venture.

For many independent professionals, being a sole trader provides the right career trajectory, work freedom or lifestyle benefits they're looking for. For others, it's a stepping stone to growing your business venture. 

Transitioning from a sole trader to a limited company is a notable change for you and your business, and one that comes with a number of benefits and considerations.

Here are 5 reasons the time might be right for you to make the change - and what other options are available to you if it isn't.

1. Personal taxation rates might no longer be the best option. Increasing tax efficiency is a key reason many sole traders ultimately transition to a limited company. As a sole trader, you are taxed on earnings over a certain amount, whereas this becomes much more efficient when corporation tax is involved. You can pay yourself in dividends and keep more of the earnings.
2. Driving greater brand power and perception is a priority for you. Being a limited company isn't the only way of building your brand - but reputationally speaking, it does help. Given the criteria needed to become a limited company, the status can indicate greater security and reliability, for your customers, in the media and with other businesses.
3. Accountants or financial advisors have indicated it could be the right step - more than once. Any counsel that you've sought is there to give you the best possible guidance for you, your business and your individual situation. No, it doesn't automatically make it the best course of action. But yes, it could be time to take more serious consideration. Before taking any financial advice, you should ensure the party is fully qualified, accredited or monitored.
4. Business expense limitations are also limiting your overall capabilities or growth strategy. Sole traders are able to claim a number of business expenses through their self-assessment, but these are somewhat constricted. A limited company, on the other hand, has a broader range of what it's able to claim.
5. Investment could be on the horizon. It isn't for everyone, but gaining investment into your business might significantly accelerate growth, support your long-term objectives or even enable you to sell down the line. Becoming a limited company isn't a guaranteed route, but many professionals do find it easier to gain traction this way.

Unless becoming a limited company was always in your business growth strategy - or an obvious next step for you - you might also want to look closely at what other options are available to you.

Alternative options

If a limited company doesn't sound like the next natural step for you and your venture, what other options could you consider?

Partnership. Formed of two or more professionals, a partnership holds many similar legal, financial and administrative benefits to sole trader status and can make it feel like a simple evolution of your business.

As with most pros there are cons, and this lack of formality can certainly be one of them. Another big consideration? A partnership makes all parties liable for any debt accrued within the business, and if one partner isn't able to pay what is owed, the amount will automatically fall to the remaining.

Limited Liability Partnership. Known as an LLP, this is often an intermediary step before deciding to become a limited company. It will mean you're registered under Companies House, aren't personally liable for debt, and will provide more financial separation.

As for the cons, becoming an LLP can be complex and time consuming, and that doesn't necessarily stop when the process is complete. You will likely need to complete more director duties than before, and there's corporate tax to consider.

Taking the next step

If changing your status from a sole trader to a formally recognised limited company sounds like the right decision for you, you're already well on your way to growing your brand venture. Safenetpay supports a whole host of professionals - sole traders, SMEs and more - with their business finance. Meaning it could be the perfect fit for your new limited company.