• Sally Charlesworth

Limited Company to Sole Trader

Unfortunately many small business owners fell through the gaps of the recent help given by the government in response to the Covid-19 pandemic. In particular owner managed businesses run though small limited companies. Having been encouraged for years, by government schemes and incentives to set up limited companies - these entrepreneurs have been left high and dry.


I have been approached by a few clients - disillusioned with recent events, who wondered if changing to work as a sole trader will avoid this situation happening again. My initial response is not to have a knee jerk reaction to events beyond your control - but to take it as an opportunity to review the business, your ambitions and the path to take to get there. Part of this, may involve assessing the vehicle your business is run through - so below I have made some basic points to think about - but discuss things with your business adviser before making any significant alterations.


The decision whether to wind up your company or not - will depend on your motivation to wanting to change – Thinking about the reasons for why you set it up as a company in the first place to start:

Risk:

A company generally is perceived to be less risky – it is a separate entity and directors will only become personally liable for any debts/claims if negligence can be proved. However they are also at risk of non-compliance with statutory duties (filing accounts etc) so there is added admin. Risk can be managed in both entities via the correct insurance and practices being followed.

Perception:

Customers/clients often perceive companies to be more secure and reliable – the added administration and checks that go on for companies can give an element of comfort to clients that you are here to stay and taking your business seriously.

Cost:

There are added costs to running a company – increased accountancy fees due to the administration of statutory accounts, running of payroll and more technical and ongoing advice about profit extractions. Other than that I don’t anticipate huge cost savings for going self-employed.

Administration Burden:

There are added administration burdens on directors to running a company – filing accounts- confirmation statements – monthly payroll – dividends etc – however your accountant will generally take care of this - hence the increase in costs as mentioned above. As a sole trader you will still need to ensure your bookkeeping and accounts are accurate as your tax will still need to be calculated correctly – so your day to day administration will be similar.

Tax:

There are significant tax difference between companies and the self-employed and this will depend on your individual and family circumstances. Generally based on current tax policies savings on tax efficiencies can occur by working through a company on around profits around and above £40k per year. Where the company is husband and wife, further savings can be made through two sets of dividends/salaries/mobile phone/trivial benefits etc.

Changing from Company to Sole Trader:

If you decide that you want to make a permanent change to being a sole trader – then steps to close or make the company dormant will need to be taken. This would mean producing cessation accounts, settling all liabilities, changing insurance policies, selling all the assets, closing bank accounts etc. It is time consuming and therefore not recommended unless you are sure that trade needs to cease through the company for the foreseeable-mid future.

Running both a company and sole trader alongside each other doesn’t generally make commercial or financial sense – but this can explore this if you have specific reasons.

If your reasons for switching a purely financial rather than commercial – then a first suggestion would be to do a cost analysis and see where any savings can be made, before making and significant changes, which will involve further costs to implement, and take time away from business recovery during this crucial phase.




Charlesworth Accountants  and Sally Charlesworth are trading names of Charlesworth Accountants Limited - A private limited company registered in England and Wales. Company no. 12255228

Directors: Sally Charlesworth MMath FCA

Registered office: 1 Taxal View, Fernilee, Whaley Bridge, High Peak, SK23 7HD

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