Two of the main legal structures when it comes to setting up a business are a sole trader and a limited company. According to statistics, approximately 3.5 million sole proprietorships, representing 59% of the total number of small businesses in the UK, were active in 2024.
In turn, 34%, or around 2 million, active organizations were established as limited companies. It is essential to pick the form that best accommodates your current business plan and challenges as each offers its own benefits and comes with certain disadvantages.
If you have determined that the time has come to switch your business to a limited company status, then you will need to follow the strict requirements of the law that govern this procedure. The process contains multiple steps and can be confusing for people who have no experience in the matter. A good decision might be to seek help by consulting with an accounting firm such as accountantseastlondon.com.
Why Should You Switch?
Operating as a sole trader is considerably easier as you won’t have to deal with a lot of the requirements imposed on a limited company. Furthermore, the law doesn’t differentiate between the owner and the business when it is established as a sole trader. This means that you will have full and free access to all of the assets of the company and can take money out of the business whenever needed without additional hassle.
Being a sole trader, however, has two major caveats. First, because the owner and the business are considered to be the same legal entity, sole traders that hit a bad period leading to major financial losses risk having their own personal assets seized.
On the other hand, if you keep showing consistent growth, it could result in higher taxes that will eat up some of your profits. Both concerns and more can be addressed by switching to a limited company.
Starting a Limited Company
Having the support of an expert could be invaluable as they may advise you on the best possible options while taking into account the individual characteristics of your business. After all, upon successfully setting up a limited company, you will need to transfer the current assets of the sole trader entity.
Select a Name
First, decide on a name for your new company. Limited companies are recognized as separate legal entities and they need to have a unique name. Furthermore, the UK’s Companies House, the agency responsible for the incorporation of businesses, won’t validate any offensive, sensitive or inappropriate words and phrases.
While you are at this stage of the process, you should also check if the chosen name is available for use as a URL by performing a domain check. After all, nowadays no self-respecting business can operate without having an online presence.
Elect Directors
As part of its structure, every limited company needs to have at least one director. The chosen person will have a range of responsibilities within the company that can be summed up as the director’s fiduciary duty.
In short, they will have to act in good faith and in the best interest of the company, make sure that the reported financial accounts reflect the true state of the business and that they are filed in accordance with the law. Directors also have to register for Self Assessment and subsequently provide a Self Assessment tax return annually.
Shareholder Structure
Apart from directors, limited companies need to have at least one shareholder. If you do not wish to bring additional people to your business, it is perfectly legal to fulfill the roles of both a director and a shareholder at the same time. In this case, you will own 100% of the company’s shares.
When registering your limited company, you will need to provide information about its share structure – how many shares have been issued and how they are spread among the shareholders. For example, a common practice is to start a limited company with 100 shares, each valued at £1. The owners of the shares must pay their respective value to the company’s bank.
Here we have to also define what a person with significant control is. These are individuals or other business entities who have over 25% of the shares of the limited company, over 25% of the voting rights, and who are allowed to appoint or remove the majority of the company’s board of directors. You will need to identify any such persons related to your business and inform the Companies House through a PSC (Persons with significant control) register.
Keep Strict Records
Limited companies may come with distinct advantages when compared to a sole trader but they also require a significant time investment to meet all of the additional regulations. You will need to have accurate records about the organizational structure and financial state. Failure to meet the requirements of the law could lead to fines or the disqualification of the directors responsible for the records.
The company records must include factual information about the limited company’s share transactions, the outcomes of any shareholder votes and resolutions, details about loans and mortgages secured with company assets, as well as payments known as ‘indemnities.’
As for the financial and accounting records, they must include a detailed breakdown of the money flowing into the company as well as the funds it spends as part of its operations. These details must show clearly the owned assets, any debts, bought and sold goods, stocks owned, and more.
Limited companies need to file a tax return that involves numerous financial calculations. If you are not familiar with performing such tasks, it may be best to look for a professional account service that can both help you and ensure that the reported numbers are correct and factual.
Incorporate the Limited Company
The last step is to incorporate your new business. This involves registering the company with the Companies House, choosing the official address of the newly created legal entity, and finding the appropriate SIC code that corresponds to the specific type of business you are going to conduct.
The act of registering can be done via the official Companies House website for a fee of £15 or through other incorporation pages. Another requirement is to provide the address of each director. This can be the person’s residential address or a ‘service address,’ if they wish to keep their details off of the public register.
The move to a limited company can open up new avenues before your business as it brings added legitimacy and makes acquiring funds from financial institutions far more accessible. At the same time, the limited liability will protect your personal assets.
