Should I change my business from a limited company to a sole trade?


At WBS Accountants, we had a few limited company clients who have found their turnover dropping as a result of the pandemic.  They wondered if they would be better off as a sole trader and there are probably other businesses thinking the same thing.

We thought we’d share our thoughts.

What Made you Become a Limited Company?

Ask yourself this before you make any decisions. There are many reasons, from industry requirements, protection through a limited liability structure, but often it’s the more obvious answer – to save tax!

The last few years have been exceptional for businesses of all sizes across the globe, and we’re all still feeling the repercussions. However, the way your business has performed recently isn’t necessarily an indicator of the next six to 12 months, and changing your status might not be the best business decision you think it is right now.

Our Advice to Clients

For clients who’ve come to us with this concern, we’re recommending they wait at least six months to see what happens with their business – giving yourself some time won’t hurt. If the business continues to decline rather than pick up, then it’s something worth looking at.

Looking at it from the other way round: if you are looking to change your sole trader business to a limited company, you would want your business to be generating around £40,000 of profits, as this is the tipping point, when the extra costs will be covered by the tax savings available.

Let’s say you’ve dropped from £70,000 to £30,000, this would be a big drop, but we would suggest you wait a little longer to see if it recovers. However, if you’ve gone from £40,000 to £20,000, it could be that now is the time to consider a change to your business status.

How Would it Affect Your Accountancy Support?

We find we have more conversations with our limited company clients throughout the year to catch up on how the business is doing when we are helping with routine submissions such as VAT returns and payroll, which does mean we have plenty of natural touchpoints throughout the year give them relevant and timely advice.

If you have previously seen value in that level of support you may want to ask your accountant to build in a mid-year review as part of the services if you do change your business status.

What About VAT ?

A common misconception is that if turnover has dropped below the VAT threshold a business needs to return to sole trader status avoid being registered for VAT. That’s not true – VAT thresholds are the same for sole traders, partnerships and limited companies, so limited companies who drop below the VAT threshold could simply deregister.

A Few Final Things to Think About Before You Change Your Business Structure

If you’ve weighed up your options and decide you do want to change from limited company to sole trader, there are a number of important steps to make sure that you are doing everything both practically and legally.

Before you stop trading as a limited company, check if you have losses brought forward that you’ve not used against profits. If you have put money in to support the business over the years, you’re never going to recover that money once you close that company and those losses will be lost.

You can look at the options around how to utilise those losses before you go ahead and your accountant can review your latest management accounts to look for scope to do that.

Whether your business owes money to anyone or not depends on the options you have available to you. You must seek advice to make sure you can extract any cash left in the business legally. If you don’t have a large amount of cash left in the company and no significant amounts owed out, then it may be possible to apply to Companies House for a straight forward company ‘strike off’ from the register.

However, before you start that strike-off process, make sure you have paid any tax due to HMRC and all outstanding bills (including your accountant) before you close the bank account. It’s a good idea to have someone look at your accounts to get the full information needed to finalise your last set of accounts.

If the company’s affairs are more complicated, then you will need to seek professional advice as the company may need to be formally wound up by a liquidator.

One final thing to consider before changing your business structure is what the impact will be around government financial support for traders during the current Covid pandemic, so make sure you get some advice from your accountant before you make any final decisions.

If anything you have read here has raised more questions, please feel free to give us a call on 0191 2460747 to see how we can help you.

If anything you have read here has raised more questions, please feel free to contact us to see how we can help.