How to change from a sole trader to a limited company

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Many businesses start off as sole traders. This can be the most convenient form for a new company to take and allows the entrepreneur to find their feet when learning simple business processes. Over time and following growth, a sole trader may consider becoming a limited company.

There are many matters to assess before making this decision. Changing from a sole trader to a limited company brings benefits but also presents challenges that can be difficult to navigate alone.

At Uniwide, our company formations specialists have created this guide to help you understand how to change from a sole trader to a limited company.

What is a sole trader?

A sole trader is a business controlled and owned by an individual. In this situation, the owner would be classed as self-employed. When operating as a sole trader, no legal distinction is made between the owner and the company. It can be simpler to set up and run a business as a sole trader, but it also comes with risks. Sole traders are personally responsible and liable for any business losses, debts or legal claims. The personal finances and assets of the owner would be at risk should they be unable to pay their business debts.

What is a limited company?

Limited companies are owned by shareholders and managed by directors. Each limited company can have one or multiple shareholders and directors. Just like a sole trader, limited companies can be run by a single person acting as both shareholder and director. There is also the option of running the business jointly with partners.

A limited company comes with its own legal identity. This means the company — not the owner — is liable for losses, debts and legal claims. All finances of a limited company are entirely separate from the personal finances of its directors and shareholders. The benefit to business owners of this system is that it provides them with limited liability, protecting their personal assets. Limited liability is one of the main reasons why many business owners choose to change from a sole trader to a limited company.

What are the advantages of changing from a sole trader to a limited company?

Business owners are advised to weigh up the advantages and disadvantages of changing from a sole trader to a limited company before making the change. Informed decisions will help them choose the right solution for their business.

The following is a list of key benefits of becoming a limited company:

  • Business name protection. By changing to a limited company, your business name is protected and others are prevented from using it. This is particularly relevant if you are investing time and money in building a website, designing a logo and creating marketing material, for example. To grow your brand, it is essential that your company’s name and other similar pieces of intellectual property are protected.
  • Tax efficiency. One of the most challenging aspects of being a sole trader is that you are taxed on your profits. Depending on how much revenue your business is making, you may have to pay up to 45% of your income to HMRC as tax. Changing to a limited company allows you to pay corporation tax on your business income, which is less than personal tax rates and more tax efficient in the long run. Limited companies also have the option of paying dividends to shareholders and directors, reducing their personal tax and National Insurance Contributions (NIC).
  • Limited liability. Running a limited company means that you will not be personally liable for any debts or losses that the business incurs. This provides a safety net, ensuring you will not be left in a financially precarious position should something go wrong.
  • Professional status. All limited companies can use “Ltd” at the end of their business name. Although this might seem like a small matter, it does help your business appear more professional. Operating as a limited company shows your clients that you take business seriously and will engender confidence in your services.

How much does it cost to set up a limited company?

When setting up as a limited company, you will need to pay an incorporation fee of £12 to Companies House. At Uniwide Formations, we offer different packages to help you form a limited company quickly and easily. All of our packages include the Companies House filing fee, which we pay on your behalf. Our basic package is just £15.99+VAT and includes:

  • A digital certificate of incorporation
  • Digital set of memorandum and articles of association
  • A digital company register
  • A digital share certificate
  • Digital incorporation minutes

We also offer Privacy, Advanced, Premium and Non-Resident packages, allowing you to choose the perfect option for your business requirements. Once your business is set up as a limited company, you will be required to pay ongoing statutory costs of £13 a year. This must be paid to Companies House when you file an annual confirmation statement. Most limited companies also choose to hire an accountant to assist with tax returns. This additional cost must also be considered.

How to switch from a sole trader to a limited company?

Changing from a sole trader to a limited company need not be a confusing or time-consuming process. With the help of Uniwide Formations, you can make the switch to a limited company quickly and easily. Our experts have created this step-by-step guide outlining how to change from a sole trader to a limited company:

Register as a limited company

The first thing you need to do is register with Companies House. The easiest method of doing so is to use an approved formation agent like Uniwide. Using a formation agent is simple and the process can be completed online in minutes. Companies House often processes applications on the same day. In order to register your limited company, you will need the following:

  • A registered office address
  • A unique company name
  • One or more shareholders
  • One or more directors
  • A service address for each shareholder and director
  • Standard Industrial Classification (SIC) codes

Tell HMRC about the change

Once your new limited company has been incorporated by Companies House you can start trading under this new structure right away. You must let HMRC know that you are no longer a sole trader and that you are stopping your self-employment. There is an online form that you can complete for this. Before you get started you will need the following:

  • Your Unique Taxpayer Reference (UTR)
  • Your National Insurance (NI) number
  • Your full name
  • Your date of birth
  • Full address
  • The date you stopped being self-employed
  • The nature of your business

At the end of the tax year, you must still complete a final self-assessment tax return, which will cover your self-employed earnings up to the date you ceased operating as a sole trader.

Transfer your sole trader business

Depending on your business, you might have to transfer any existing business assets to the new limited company. This may include business equipment, machinery, property, or inventory. As a new limited company, you may not have the funds available to purchase these assets. Some business owners solve this problem by taking out a director’s loan and paying for the assets over time. Transferring assets can potentially result in capital gains tax (CGT) liability based on the current market value. In some cases, CGT can be deferred or reduced by tax relief options.

Open a business bank account

It is not a legal requirement for either limited companies or sole traders to have a business bank account. Keeping business finances separate from personal finances, however, is advised. When moving from a sole trader set up to a limited company, it is worthwhile opening a business bank account if you do not already have one. Uniwide works with many major banks in the UK and we will help you to set up a business bank account as we set up your limited company.

Register for PAYE and tax

After incorporating your limited company with Companies House, they will inform HMRC, who will send a letter to your registered office address approximately two weeks later. The letter will provide information on your tax obligations and issue your business Unique Taxpayer Reference (UTR). Within three months of beginning to trade as a limited company, you must register online for corporation tax. To do this you need your UTR and company registration number provided by HMRC. If your turnover is likely to be higher than £85,000 a year, you must register for VAT. In order to pay yourself a director’s salary and to pay any employees, you must set up Pay As You Earn (PAYE) and register as an employer.

Changing from a sole trader to a limited company can seem like a challenging and confusing task, but it does not need to be. Uniwide Formations offers a range of packages to suit a variety of needs, so you can make the switch with minimal effort. For more information, contact us today.

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