You can choose to change your businesses status from sole trader to limited company at any time. Both formats have their pros and cons, the best choice will depend on a combination of your current situation and future plans. However there may be an optimal time to make the switch and that is when the benefits of being a limited company outweigh those of begin a sole trader.

So when might this be? Well here are a few possible situations in which it might be the right time to make the switch, but it is important to make sure you calculate the potential benefits and savings first before making the switch.

You may decide its time to make the switch if:

Your salary is increasing:

As a sole trader you have only one way to take your salary, and that is as a salary, plus you must pay both income tax and national insurance contributions on it. A company director on the other hand can choose to take their wages by a combination of salary and dividends. Dividends are free from national insurance contributions. So as a company director you can reduce your taxes by taking a small salary and the rest from dividends, making it a more tax efficient way.

You are looking for investment:

If you are looking for investors, then setting up as a limited company means that you can sell shares to investors. Also there is the added perception that a company has more credibility than an individual, and so many companies prefer only to do business with a limited company. Due to this, potential investors are likely to be more open to investing in a limited company as opposed to a sole trader.

You are concerned about liability protection:

As a sole trader you and your business are considered one and its debts are yours, so if your company fails then you are liable for it’s debts. A limited company on the other hand is legally a separate entity from its owners, and so if your company is fails then your personal assets are not at risk, because as a share holder you are not liable for its debts.

Your company profits start to grow:

When you are trading as a sole trader, you are taxed via the annual self assessment system and you and your business are considered one entity. A company, however is taxed via the corporation tax system. There are some potential tax savings that can be made by switching to a limited company.

For example, for the 2016 -2017 tax year, as a sole trader your tax free allowance is £11,000, you the pay 20% tax on any amount between £11000 and £43,000, after which you are taxed a higher rate of 40%. However for a limited company, the annual small profits tax rate is currently 20% on any amount up to £300,000. So switching to a limited company may be more tax efficient because even though it is taxed at the same tax rate, it has a much higher maximum amount.

You want to protect your intellectual property:

By registering your company name with companies house, you prevent any other person or business from using the name, it is now protected by law. However as a sole trader you don’t have this protection, and so it can be a lot harder to protect your name.

So there are some scenarios in which you might consider changing from a sole trader to a limited company, because to do so will result in some form of savings and other tangible benefits. If you do make the decision to switch, you then need to notify the HMRC that you are becoming a limited company, and then de-register as self employed. From there it is a simple process of registering your business with Companies House and then you can start trading as a limited company.