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As your company progresses and grows, the natural next step for many Sole Trader businesses is to register as a Limited Company. Doing so can bring with it several valuable benefits, from tax planning to how others perceive your business. But for many business owners out there, you might be wondering whether the reverse is also possible; in terms of changing from a Limited Company to a Sole Trader. Can you unregister yourself as a Limited Company and become a Sole Trader once again? This article will explore these questions and the potential benefits for your company in doing this.
What is a Limited Company?
A Limited Company is one of the most popular, common and widespread company structures in the world. The name comes from the fact that limited companies are "limited by shares" or "limited by guarantee", depending on whether your business is for profit or not. Assuming that your business has been set up to make a profit (limited by shares), your company will be defined as a legally separate entity from yourself and the others that run it, complete with separate finances from your personal accounts. Your company will also have shares and shareholders, each with a controlling stake in the business, and the business is free to keep all profits made after tax.
Read our blog regarding tips and tricks when setting up as an LTD
Working as a Limited Company
As a Limited Company, there are several responsibilities and duties that you need to keep on top as a person of authority within your business. This extends to things like financial and administrative matters such as:
- Bookkeeping; the keeping of company records and informing the Companies House of any changes made.
- Filing your accounts and your company tax return.
- Paying Corporation Tax**.
- Following your company's rules, as outlined in the articles of association.
You are legally responsible for all of these things as a company director and may be fined, disqualified or even prosecuted if you do not meet these responsibilities.
**The rate of Corporation Tax paid will change in 2023. Learn more about these upcoming changes to Corporation tax.
Limited Company advantages
With a clear idea of what a Limited Company is and what it is like to work as a director, we can more closely analyse the benefits of this company structure and some of the main reasons to perhaps reconsider changing;
- Lack of Personal Liability: Unlike when working as a Sole Trader, the finances and legal responsibilities of running a Limited Company business are kept separate from you, the individual. This means that your assets and financial accounts will always be safeguarded should your business run into trouble.
- Professional Progression: Limited companies are often regarded by many as a "step-up" from Sole Traders, a natural progression as your business grows and develops. Because of this, more and varied doors open up to you that wouldn't be available for a Sole Trader, such as new client and investment opportunities and more locations and markets to operate in.
- Tax Planning: Sole Traders are required to pay types of tax such as National Insurance contributions and Income Tax, with income tax ranging from 20% to as high as 40%. However, in the UK, limited companies pay something known as Corporation Tax on their profits, an amount of 19%. In terms of tax planning, this can provide you with several opportunities to reinvest surplus cash into the company, postpone the withdrawal of company profits to a later tax year and more.
Limited Company disadvantages
However, as may be the case for someone seeking out an article like this, there also several challenges and drawbacks related to running a Limited Company business, which can be off-putting, disadvantages such as;
- Companies House Affiliation: As a Limited Company, you are legally required to register with the Companies House. Doing so requires an incorporation fee to be paid, and as well as this, there are certain restrictions to things like company names.
- Stringent Bookkeeping and Tax Planning: Limited companies also have to engage in a much greater depth of tax planning and accounts management processes when compared to Sole Trader businesses. For a start, accounting requirements are generally much more complicated and time-consuming, and many feel the need to hire an accountant to help deal with this, an additional expense. Additionally, a Company Tax Return and annual accounts must be delivered to the HMRC every year, and you are required to keep strict records, including taking minutes of meetings and noting down all decisions taken by shareholders and directors.
- Public Records: As a Limited Company, registers and records must be dutifully maintained and made available for inspection at your registered office. Any changes made to the details of your company must be reported immediately to the Companies House, and corporate and personal information can be disclosed in the public eye.
The case for becoming a Sole Trader
Sole Traders, or sole proprietorships, are the alternative company structure discussed in this article. Sole Traders are defined as being operated by a single individual; unlike a Limited Company, no legal distinction is made between you and the business entity, the director. Under this structure, you have complete control over every aspect of your business, from administrative duties to the financial aspects. This can be considered a high-risk situation, as your personal accounts and assets are tied to the business, meaning you have a considerable amount of personal liability to manage compared to a Limited Company, but the benefits can outweigh these risks.
Read our blog on how to set yourself up as a Sole Trader.
Sole Trader benefits
When compared to the business structure of a Limited Company, becoming a Sole Trader brings with it lots of advantages that you would never experience as a Limited Company, advantages such as:
- Easy Set-Up: Under a sole proprietorship structure, the process of setting up your business is by far the easiest, requiring very little in terms of registration. For more information on this, you should read our blog on how to set yourself up as a Sole Trader.
- No Corporation Tax: As a Limited Company, you are legally required to pay Corporation tax, at a rate of 19% (for now). There is no such obligation as a Sole Trader, with the only tax you need to worry about being income tax.
- No Companies House: As a Sole Trader, there is no legal requirement to register your business with Companies House. This applies when your business is earning less than £1,000. When doing so, this will only be to submit self-assessment tax returns. This means no incorporation fees to pay, no restrictions on name registration and more freedom.
- More Flexibility: To continue the point of you having more freedom when running your business, Sole Traders will always have total control over how their company operates. Without consulting other directors and shareholders, you can change direction and strategy and have explicit control over all business assets.
- Profitability: Since you are the business, you are the one that will gain all of the profits from your business's operations. You will not need to share them with any other significant individuals.
- Tax Allowances: Business expenses, such as machinery and IT equipment, furniture or vehicles, could be claimed as capital allowances. This may also include other expenses made in the course of your company's operations.
Changing from a Limited Company to a Sole Trader
There are dozens of reasons you might be looking to revert to being a Sole Trader from a Limited Company. It might be because of the several advantages and drawbacks we have highlighted beforehand. Maybe it is a necessary change, due to a problem with how your company is operating currently. Whatever your reason might be, the process of changing from a Limited Company to a Sole Trader is relatively straightforward. To stop trading as a Limited Company and start trading as a Sole Trader once again, you need to close down your Limited Company. This will occur through two methods;
- Solvent Company: Meaning your business can still pay its bills. You will need to either apply to get the company struck off the Register of Companies, or start a members' voluntary liquidation.
- Insolvent Company: Meaning your business can no longer pay its bills. In this instance, you will need to arrange the liquidation of your company or apply for a company voluntary arrangement.
- You could also simply allow your company to become dormant if no longer trading, so long as you're not still receiving income. This can be useful if you see your Sole Trader business returning to a Limited Company in the future.
For more information on how to go about closing your Limited Company, you should read GOV.UK's guide to closing a Limited Company.
- Sole Traders do not need to be officially registered anywhere at all, but since a Limited Company is, you will need to inform the HMRC of any changes to the structure of your company and that you have stopped trading as a Limited Company.
- The next step is now to begin officially trading as a Sole Trader. We have a whole blog article that you can read for this step, dedicated to explaining how to set yourself up as a Sole Trader.
- You will also need to inform your customer base that you are no longer trading as a Limited Company, all branding, such as your website details, stationery and more, will need to be updated to reflect this change. New agreements and contracts may require signing and issuing, and your bank will also need to change your account to a personal business account.
How UK Postbox can help
Whether or not you choose to make the change from a Limited Company to a Sole Trader, or stay as you were, our business address services can be of use to you. Our business addresses can be used for myriad purposes, including:
- A Correspondence Address: This is an address you use to be officially contacted at, but not one that you live at; something that you can use our virtual addresses for. Additional information on correspondence addresses can be found in our blog on the differences between correspondence addresses & residential addresses.
- A Business Trading Address: This is an address that is used simply to conduct all of your business from. For Sole Traders especially, our Business Addresses can be used as a trading address. This can enable you to protect your privacy at home or in the workplace.
For Sole Traders, even when your addresses are not in public records, our business addresses can be a benefit because:
- Using our addresses provides access to our digital mail management platform. This platform can help Sole Traders manage all of their business mail online and separate it from day to day post.
- They provide a more professional-looking address that can be used on billing and equipment, such as stationery and business cards.
- With our virtual business addresses, you can also avoid using your personal, residential address on billing and business equipment.
Deciding whether to remain as a Limited Company, or make the step to reverting to a Sole Trader, can be a difficult decision to make. Both structures have their benefits and drawbacks, but the circumstances of your business might necessitate a change to the simpler, more streamlined company structure of a Sole Trader. If you decide to change to a Sole Trader structure, UK Postbox will be on hand to provide you with all the online mail management needs you may require in this process.