Business Organisations

Converting Between Business Types

Sole Trader Converting to a Private Limited Company (Ltd)

Reasons to convert

• Limited liability — personal assets protected if business fails
• Access to capital — can raise finance by selling shares to private investors
• Continuity — business continues even if ownership changes
• Tax planning — corporation tax rates and allowances may be more favourable
• Credibility — "Ltd" status can increase confidence among suppliers and customers

Implications of converting

• Must register at Companies House and comply with the Companies Acts
• Annual accounts must be filed and become publicly accessible
• Additional administration — directors' duties, filing requirements, audit threshold
• Loss of complete privacy
• Profit is now shared with other shareholders (if new shares issued)
• Corporation tax replaces income tax on profits

Key steps

1. Choose a company name and register with Companies House
2. Prepare Memorandum of Association and Articles of Association
3. Issue shares (minimum one share)
4. File confirmation statements and annual accounts annually

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Sole Trader Converting to a Partnership

Reasons to convert

• Need additional capital that the sole trader cannot provide alone
• Share the workload and responsibilities
• Bring in a partner with complementary skills or expertise
• Cover during illness or absence

Implications of converting

• Loss of full control — decisions made jointly
• Profits are shared according to the agreed profit-sharing ratio
• Still unlimited liability — each partner is jointly and severally liable
• A Deed of Partnership should be drawn up; without one, Partnership Act 1890 applies
• More permanent arrangement than borrowing — a partner's capital cannot simply be repaid on demand
• Potential for disputes and disagreements