How do I change from being a sole trader to a limited company and are there advantages to doing so?

Many new entrepreneurs start their business as Sole Traders. There are a variety of reasons for doing this - amongst them are:

• The ease of setting up a business - no formal registration except with the HMRC - formerly the Inland Revenue
• No formal submission of finances - except when called in by HMRC
• The ability to make business decisions unhindered by other people.

 

However, all Sole Traders are aware of the downside of their legal business status, i.e.:

• Any debts that the company accumulates are viewed as personal debts and this can lead to personal financial losses.
• There is no right in law to the company name. If a Ltd Co sets up using your name, then you face a legal battle to secure the right to use it.
• Sole Trader status can be seen in some industries as being less reputable.

 

Having considered these factors, many Sole Traders do eventually decide to change their company status to Ltd Co. The most common reasons for doing this are:

• The success of the business, leading to long lines of credit and greater investment in the company. Ltd status allows for greater personal financial protection.
• Taking on staff. This will require greater financial accountability and a human resources policy, both of which would benefit from Ltd status.
• The introduction of a business partner into the company. Ltd status gives much greater protection than a Partnership Agreement and also allows for external investment, as well as a legal framework for outlining the responsibilities of and benefits to, all interested parties.
• The need to protect a business name. This can be done through copyright and trade marking, but can be long and expensive processes.

 

The process of becoming a Ltd Co is a simple one. There are agencies that can assist you in setting up a Ltd Co. For instance your accountant or solicitor, may offer this service and will be well placed to undertake the legal aspects. In addition, there are enterprise firms such as TBV Business Services and BBV.

 

There are a number of companies online who can set up a Ltd company for you. Examples are EAC Business Services and The Companies Warehouse. It is also possible to set up a limited company yourself using forms and advice from Companies House. However, the paperwork can be daunting and it is important that you do not miss any of the steps. For that reason alone it is worth consulting a professional.

 

There are fees for setting up a company. These can be from as little as £40 for the most basic form filling, through to £600 for a package that offers to set up a website and hosting and full accountancy. The choice is yours, but £200 is a good average price to pay for such a service.

 

Once you have opened your Ltd Co, remember that this means additional responsibilities:

• You will be expected to submit financial records on a yearly basis
• You will need to appoint a Company Secretary - this is not as onerous as it sounds, but this person should be someone who is prepared to countersign documents and to keep a responsible eye on what is happening within the company.
• You will become a Director of the company. You may also appoint one or more other Directors, all of whom will have responsibilities as laid down in your company documents and agreed by you all. These terms may include:
•       how the company is divided should you sell
•       what happens to a Director's shares should they die
•       who has responsibility for what aspect of the company
•       what each Director can expect to receive in terms of profit
•       what would happen should one of you decide to leave
•       what happens if one of you takes maternity/paternity leave
• You become an employee of the company and therefore have to set up PAYE and other monitoring processes.
• You have a legal responsibility to manage the company and its finances and resources in a responsible and mature manner. Failure to do so can lead to legal procedures against you, and even to bankruptcy.

 

Becoming a Ltd Co is a good option for a business that is growing and has substantial financial commitments or assets. It protects the owner of the company and increases status. It does require more work, but the benefits are usually worth it.

Tania M C Lewis

22nd Nov 06