How to change from a limited company to sole trader?

Limited liability companies (LLC) have many benefits, but sometimes operating a limited company isn't feasible. A sole proprietorship (SP), also known as sole trader, is another option if a limited company takes its toll. 
 

This assessment article guides company owners and explores what both of these business models mean for you as an owner. It also guides you in the procedure for changing your business model, how it affects your accounts and companies, and the advantages and disadvantages of doing so.

Business Definitions

Below, we look at the definitions of the separate business models.

Limited Liability Company

Businesses that are registered as limited companies are more focused on the company than the self. These businesses are operated as a mix of a general partnership with other directors and a business corporation. 

Shareholders own a percentage of the company, and their influence on how things run depends on the company percentage the shareholders own. Businesses have various benefits as a limited company, such as flexible tax payments, personal liability protection, employed benefits, and more.

Sole Proprietorship

A sole proprietorship, also known as a sole trader, is the most common business model and often the one you start with from your house address without insurance, as it doesn’t require approval procedures from the government or bank. You simply need to hand in the applicable paperwork to the HMRC and start your trading. You are the sole company owner, and your personal self isn't separate from the company. As such, the company profit is yours, and you manage the business on a personal level.

Benefits of Switching from LLC to SP

Often, limited liability companies require a more significant start-up capital than a self managed one and have more regulations on how it’s run. You also don't hold all the power to change and manage your business. Shareholders have a say in how to manage the company and have some right to company assets. Your assets aren’t your own, and you receive a percentage of the profits. If the business didn’t work out, you can consider changing to a sole trader as a way to place everything back into your hands.

How to Make the Change

When starting as a sole trader, you need to ensure you follow the correct procedures. Make sure you properly dissolve the limited company before starting up as a self managed business. You need to take a number of crucial steps before trading as a sole trader. Below, we provide an assessment guide on how you go about changing your business structure.

What to Keep in Mind

Before dissolving your limited company, hire an accountant to organize your finances. Once you dissolve a limited company, corporate tax losses are lost. Generally, these losses are carried forward and offset against future profits in your VAT account. However, closing the company down means you give up the opportunity to offset these losses against your profit.

If you have employed persons and separate directors, you need to consider whether you’re keeping them on in the new company and the logistics of doing so

Advantages and Disadvantages

Below, we provided an assessment of the pros and cons of changing your business model.

Advantages

• You’re the business owner and director
• You can operate from your house address
• You get all of the business profits
• Manage your own accounts
• Better privacy and low start-up costs
• Operate your business online or in person

Disadvantages

• You have no insurance or limited liability for a debt
• The bank register you and your business as one entity
• You file for personal VAT returns rather than corporate VAT returns
• Dissolving your LLC isn’t free and can take time, like a year or mor