Editor | 13 October 2021
How to switch from sole trader to limited company

How to switch from sole trader to limited company

Many sole traders think that they need to set up a limited company to take their business to the next level.

This isn’t always true. Deciding whether to set up a limited company should be a matter of personal preference, but there are some key advantages to going limited.

  • It can be more tax efficient
  • It gives you limited liability, so you can’t be held personally responsible for company debts as the company is a separate legal entity
  • It can give your business more credibility, particularly when dealing with larger businesses
  • It makes it easier to grow and sell your company

However, going limited does mean more administrative work. And that starts with the set-up. There’s a set process that you need to follow if you want to switch from being a sole trader to working through a limited company.

Registering your company

First of all, you’ll need to register your limited company with Companies House. This is simple, but you will need to decide some basic information like:

  • What your unique company name will be
  • Where the company’s registered address will be (bearing in mind this will be public information)
  • Who will be your company’s Director(s)
  • Who is going to be a shareholder in the new company

You’ll also need some personal information from your company’s Directors and shareholders. You can find out more information on the Government website.

Tell HMRC that you’ve stopped working as a sole trader

You must tell HMRC when you stop working as a sole trader. This is another simple process that you can complete on the Government website.

Transfer assets to the limited company

Because a limited company is a separate legal entity, you don’t own them in the same way you do when you’re a sole trader.

This means that when you set up a limited company, you need to transfer relevant property, inventory, machinery, equipment and other business assets to your new company.

Because your business is unlikely to have the money to pay for these assets, you’ll generally need to give the company a loan to pay for the assets up front. You’ll be able to take this loan back from your company without any tax implications.

Assets you hold in the sole trade business, may be liable for Capital Gains Tax.

CGT is a very complicated accounting treatment. It involves comparing how much you bought the asset for, how much the value of the asset has depreciated over time, and what the current market value is.

It’s very important to make sure this transfer of assets is treated properly when you make the switch from sole trader to LTD, or you’ll face a huge headache when it comes to submitting your accounts

Open a business bank account

When you’re a sole trader it’s a good idea to keep your personal and business finances separate, but you’re not under any obligation to do so.

When you set up a limited company, however, you’ll need to set up a business bank account and make sure you keep the company finances separate at all times.

It’s also a good idea to contact all your existing customers, suppliers and debtors to make sure they update their records and don’t pay anything into the wrong account.

Register for PAYE and tax

Once you have registered your limited company with Companies House, HMRC will get in touch to explain your legal obligations regarding reporting requirements for corporation tax and annual accounts.

They will also send your company’s Unique Taxpayer Reference (UTR) also called corporation tax reference number. You’ll need this number to make filings the future.

If you expect your turnover to exceed £85,000, you may be required to register your limited company for VAT.

When you run a limited company and it’s your only source of income, it’s often most tax efficient to pay yourself a small salary and top up your income with dividends, providing you have the profits to do so.

To pay yourself a salary (or any employees) you’ll need to register your business as an employer with HMRC. You can run your payroll in house, through a payroll bureau or via your accountants.

For more information or to get help setting up a limited company, speak to a member of the team today. Call: 01625 300 300.