Many business owners start their business as sole traders, and as their business grows, they may decide to upgrade to a limited company. Changing from sole trader to limited company offers many advantages, including tax efficiency, business credibility, limited liability of the business owner, and protection of your business name. However, a limited company involves more administrative work and sometimes higher costs. In this blog, we’ll talk about the things to consider if you want to transition from a sole trader to a limited company.
Small business owners can choose which business structure to use. The four main business structures are:
- Sole Trader.
- Limited Liability Partnership (LLP).
- Limited Company.
Understand the Differences Between the Two
Understand the differences between a sole trader and limited company structures
Before you start the process of converting your business to a limited company, it’s important to understand the key differences between the two structures. As a sole trader, you and your business are essentially the same legal entity. This means that you’re personally responsible for any debts or liabilities incurred by the business.
In contrast, a limited company is a separate legal entity from its owners. This means that the company is responsible for its own debts and liabilities, and your personal assets are generally protected in the event of any legal action or financial difficulties.
Other key differences between a sole trader and limited company structures include the tax implications, the level of administrative burden, and the potential for raising capital and attracting investment. For example, as a limited company, you may be able to attract investment from external sources such as venture capitalists or angel investors, which can be more difficult as a sole trader.
Are you thinking of switching from a sole trader to a limited company? If so, you’re in the right place. This guide outlines the steps to make the switch and offers tips to make the process as smooth as possible. Learn how to make the switch now.
Changing from Sole Trader to Limited Company in 7 Steps
Changing from a sole trader to a limited company is quick and easy. However, before deciding to switch from a sole trader to a limited company, you should seek advice from a tax accountant or financial adviser. Here are the five steps to becoming a limited company:
Before registering your limited company, you need to choose a business name. You may be able to use the same name you operated under as the sole trader, but it’s worth checking if it’s available in the company’s house or not. In addition to checking availability, you should also ensure that your business name complies with the rules set out by Companies House:
- Your name must end with limited
- You cannot copy an existing company name
- Your name should not be too similar to another company’s name.
- Your business name should not be offensive.
- You may not suggest any affiliation with authorities without permission.
You can register your limited company once your business name is set. You can do this directly through Companies House, but most new businesses use a business formation agent like Pro tax Accountant. The process is quick and easy, and most applications are approved within 24 hours. To register your limited company, you will need:
- A registered office address
- A unique name
- A director
- A shareholder
- A Standard Industrial Classification (SIC) code.
If you do not intend to hire any other directors or shareholders, you may fill any of the positions yourself. Also note that you can use either a virtual office address or a virtual director address. Using virtual addresses keeps your home address private from the public.
Once your new limited company has been formed, you must notify HM Revenue and Customs that you are stopping trading as a sole trader. This is a quick process and all you need to do is complete an online form with the following information:
- The date you stopped working as a sole trader
- Your unique tax reference (UTR)
- Date of Birth
- National insurance number
Note: After becoming a limited company, at the end of the tax year, you must file a self-assessment tax return by January 31.
At this point, you don’t have to do anything technically. But it’s a good idea to open a business account for your new limited company. Businesses aren’t required by law to open bank accounts, but it’s a great way to keep your business and personal finances separate. The benefits of a business account include:
- Easily track business transactions
- Process payroll payments quickly
- Receive credit and debit card payments
- Conduct credit checks.
Almost all major banks offer business accounts, so it pays to do some research before opening an account. At PTA we can help you open a business account with a number of banks.
5. Transfer Your Assets and Liabilities
As a limited company, you’ll need to transfer any assets and liabilities from your sole trader business to your new company. This can include transferring contracts, leases, and any other agreements you’ve entered into. You may also need to open a new business bank account in the name of your limited company.
6. Register for VAT and PAYE
If your sole trader business was registered for VAT and/or PAYE, you’ll need to register your new limited company for these taxes as well. You can do this using HMRC’s online registration services for VAT and PAYE.
7. Inform Your Clients and Suppliers
Finally, you’ll need to inform your clients and suppliers that you’ve switched from a sole trader to a limited company. This is important to ensure that any ongoing contracts
Your decision on which business structure is right for you will depend on your own situation, but some of the things that can influence your decision are:
- The type of business you run.
- Sales, growth and future growth potential of your company.
- The level of risk you are taking as an individual.
- The support you have from consultants to complete the paperwork.
- How customers view you and your professional credibility.
Forming a limited company has great benefits, making it a worthwhile decision for many people. However, it is not a one-size-fits-all structure, nor is it a fixed point beyond which conversion into a corporation is required. Most of the time, converting from a sole trader to a limited company is simply a matter of personal preference. ask yourself:
- Will I Pay Less Tax and Receive a Higher Net Compensation from a Limited Company?
- Will the prestige of a limited company help me get more customers and grow my business?
- Can I protect private assets if my business goes bankrupt?
- Do I want to attract business partners or attract investments?
- Are these benefits worth the extra administration and filing requirements?
Your choice of corporate structure will depend heavily on your situation and what you are comfortable with. If you are unsure of the best course of action, you should seek professional advice from a licensed tax accountant, many of whom offer a free initial consultation.
The easiest way to convert from a sole trader to a limited company is to hire a professional tax accountant. At Advantax, We advise you on the process and make sure that it is the right decision for you. We then take care of the registration of your limited company.