Successful new entrepreneurs with the ambition to grow their business are often encouraged to go from sole trader to limited company. This is precisely what happened with Sleep & Beyond, a soft furnishings retailer in Greater Manchester. After running the company as a sole trader under the name Style Of Fabrics Manchester for many years, its founder Nadeem Malik decided to transform it into a limited company earlier this year.
It was an important decision, as it is with every business owner; it meant a lot of changes to how his business is run. Many of the adjustments can be advantageous to a small company like Sleep & Beyond; others make the already stressful job of being an entrepreneur even more demanding.
Becoming a limited company essentially separates the business from an individual to make it its own entity. Doing this means a company is its own legal body unto itself. For a small business this mitigates the legal risk faced by entrepreneurs. If the company gets sued, for instance, you can protect your own assets in a way that would not be possible as a sole trader. Becoming a limited company, simply put, is much safer for entrepreneurs. It can also be a more cost-effective one. By being its own entity, a limited company can avoid the higher taxes facing sole traders.
When is it right to make the change?
The most difficult challenge is knowing when is the right to turn from sole trader to limited company. Not every sole trader will experience the enormous tax and legal benefits that are possible. Some say it should only be considered once your business starts making more than £30,000. Others think it should be upwards of £50,000. In our experience, there is no exact figure that small businesses should use as a benchmark. It all depends on your industry, the nature of your business and what your ambitions are for the company.
However, there is one major advantage that can assist small business of all varieties: it gives the company name some authority. Sleep & Beyond, like many retailers, is a business that works alongside multiple suppliers to deliver its products to customers. Companies in this sector almost always rely on good relationships with suppliers. Therefore, they can experience a notable advantage by registering as a limited company. It makes you more appealing to larger companies you might have the ambition to work alongside. Many would rather work with an trustworthy limited company than chance a sole trader. It proves you can be relied upon. The same also goes for businesses seeking investment.
Not an easy transition
Making the change from sole trader to limited company is not an easy one. Business owners who find finance, tax and paperwork complicated will encounter a number of intricate hurdles throughout this process. Utilising the skills of an accountant who has experience doing this would be advisable. Also, since many entrepreneurs at this stage of their careers will still be very hands-on in the running of their business, it can save you a lot of time as well as a great deal of hassle. After all, the major difference between being a sole trader and a limited company is that you now have more paperwork to file. It requires more than just an annual tax return. There is a set of accounts to send off, an annual return to complete and corporation tax to mail. An accountant can assist with this.
Many successful sole traders will be considering making the switch to being a limited company. It can have huge financial, legal and trade benefits in the future. However, it is not an easy process, nor one that just anybody should be taking. You need to be certain that it is the right time for your business to take this important step.
Further reading on sole trader to limited company
