Sole Trader Vs Company: Should You Make The Switch?

It’s normal for your business to change and evolve over time. As your business grows, these changes could look like hiring employees, taking on new company assets, making investments or expanding into new markets. 

While this can be exciting, it also means that your business could be outgrowing the governance structure that you chose when you first started it and that structure may no longer be suitable for your and your business needs. 

So, at what point should you consider changing your business structure? 

A common change in business structure involves going from a sole trader to a company structure. A company is a separate legal entity so this may offer some benefits to you, such as limited liability. If your business takes on more assets and investments, this can be a pragmatic move to try and minimise your personal liability. 

If you do decide to make the switch, you will need to start considering your legal duties as a company director and maintain detailed financial records. You will also need to register your company with Companies House and go about transferring your IP and contracts to the new company. We’ll take you through this below! 

Costs And Liabilities: Is The Company Structure Right For Me?

Limited Liability vs Unlimited Liability 

While a company can be more costly and complex than the sole trader structure, it is a separate legal entity with limited liability. This means that, generally, you will not be personally liable for any company debts. 

Many people begin as sole traders as it is simple and cheap to set up when starting a new business venture. As a sole trader, you have unlimited liability. This means that you will be personally responsible for any debts or losses in your business. 

It is important to note that there are still some circumstances in which you may be personally liable for company debt. For example, if you are seeking to get a business loan, a bank/financier will usually require a ‘director’s guarantee’ for the loan. If your company cannot make repayments, your guarantee will hold you personally liable for those debts. 

Additionally, a director may be personally liable for any debts incurred through insolvent trading. Directors have a duty to prevent the company from trading if it is insolvent, i.e. unable to pay its debts when they fall due. 

Costs and Record Keeping 

However, companies are also more costly and complex business structures than sole traders. You will have to pay more fees to register your company and a company registration number. Accounting fees and administrative paperwork are also more onerous for companies. 

Comparatively, as a sole trader, you will enjoy considerably less paperwork and less costs. You don’t need to register with Companies House.

Ultimately, if your business is expanding and you are beginning to make investments which are worth greater value and involve higher risk, it may be a good idea to switch to the company structure to protect your personal liability. Keep in mind that there may be exceptions to limited liability. Otherwise, it sometimes makes sense to continue operating as a sole trader, especially given the greater costs and complex admin involved in running a company. 

You can also find out more information about the pros and cons of different business structures.

What Are My Ongoing Duties And Responsibilities In Running A Company? 

If you do decide to switch over to a company structure, you will have a number of ongoing new responsibilities and obligations. 

Director’s Duties

As the director of a company, you will need to ensure that you understand and comply with your duties as outlined in the Companies Act 2006. 

There are several general director’s duties: 

• To act within powers;
• To promote the success of the company;
• To exercise independent judgment;
• To exercise reasonable care, skill and diligence;
• To avoid conflicts of interest;
• Not to accept benefits from third parties; and
• To declare interest in proposed transactions or arrangements.

Depending on the duty and the outcome of a breach, there can be significant and serious civil and criminal penalties.

Financial Record Keeping

All companies must keep a written/electronic form of financial records explaining their financial position and performance. This may include invoices, receipts, cheques and working papers. 

Company financial records and tax records need to be maintained for at least 6 years from the end of the last financial year. These could be profit and loss statements, balance sheets, depreciation schedules and taxation returns. 

4 Key Steps In Restructuring Your Business 

1. Register Your Business

You can register your business with Companies House. You’ll just need the following things:

• A unique business name
• A business address
• Details of at least one director
• Details of at least one shareholder
• A Standard Industrial Classification (SIC) code

2. Notify HMRC of the change

Your next step is to notify HMRC that you will be switching from a sole trader to a company structure. To do this, you’ll need some basic details like your name, date of birth and address.

They’ll also ask you to provide your Unique Taxpayer Reference (UTR).

3. Transfer Your Intellectual Property and Assets 

The company should own all of the IP rights. This is so that the company’s legal entity owns your trade mark or patent and is able to then deal with the IP in commercial transactions. For example, investors will often check whether all of the IP sits within the company. 

If you have been operating as a sole trader so far, it is likely that you currently own all of the IP. You can create a contractual agreement known as an IP Assignment Agreement to then assign the IP rights to the company. It is also important to remember that if you’ve worked with other unofficial business partners, they may hold some of the IP and they will also need to sign an IP Assignment Agreement. 

Some of your assets may be subject to Capital Gains Tax – it’s a good idea to chat with an accountant to confirm details around this.

4. Register For Corporations Tax

Once you register your company, you should receive a notification from HMRC with details around your tax obligations. For example, you’ll need to get your UTR and CRN to register for Corporation Tax.

Need Help? 

We know that it can be a difficult and important decision to take your business to the next step. It can also be daunting to try and understand your new complex legal responsibilities and duties under corporate law. 

If you have more questions about restructuring your business, reach out to us at [email protected] or contact us on +44(0)2034321860 for a free, no obligation chat. 

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