When should I change from sole trader to limited company?
Sole trading can be an advantageous way to test and refine your business model with minimal administrative costs and no registration fees. As a sole trader, you have the flexibility to make independent decisions without the need for consultations with other directors or shareholders. However, the main disadvantage of sole trading is the personal liability that comes with the business. This means that as the business grows, the risks associated with personal liability also increase. Additionally, sole traders are required to pay income tax on their profits rather than corporation tax.
In contrast, forming a private limited company offers more protection against personal liability, as the company is a separate legal entity with its own assets and liabilities. This legal structure also allows for various funding options, including the ability to obtain private equity funding by selling shares in the business. This flexibility in funding options can be a significant advantage over sole trading, which is generally limited to taking out business loans from banks.