0330 124 4675
Office Hours: 9am to 5.30pm
0330 124 4675
Office Hours: 9am to 5.30pm

Moving from sole trader to limited company

Knowing if and when to move from being a sole trader to setting up a limited company can be a tricky decision to make. Your business may be growing, you might understand the benefits the change could bring, but you worry that the process might be difficult. Is it full of pitfalls? What could go wrong? Is the effort really worth it?

At One Click Accountant, we’ve helped businesses through the process of moving from sole trader to limited company. It brings with it a number of specific advantages, and the process itself is relatively straightforward as long as you take it step-by-step.

Sole Trader vs Limited Company – which is best?

Sole Trader status is the simplest form of business. It’s the one most people begin with when they become self-employed. It requires very little in the way of administration and can be set up in minutes via the government website.  Its simplicity is its key advantage. As your business grows sole trader status opens you up to some risks. You are entirely liable for any debts incurred on the business. If you borrow money to grow your business and can’t pay it back, then you could lose private assets not connected to your business such as your home. It also limits your ability to access certain kinds of finance.

Limited Companies are separate entities in UK law, meaning that liability for debts is not extended to the business owner. Investors and lenders tend to prefer the limited company structure so finance is easier to access. There are tax advantages to setting up a Limited Company too. One downside is the greater administration, and your details, including your annual accounts, are publicly available on the Companies House website.

How to change from Sole Trader to Limited Company

As your sole trader profits start to increase and your business starts to grow, you may decide it’s time to move towards Limited Company status to help reduce your tax bill.  A Limited Company accountant will be able to advise if it’s the right time to do so financially. Incorporation may give you more of a professional edge and help your business to grow further, but if your profits remain low, there may be little point in making the transition. The costs associated with being a limited company will need to be lower than your profit to make it worthwhile.

If you do decide to go ahead, here are the steps you’ll need to follow:

  • Decide if you want to be sole director, of if you’d like to include others. What skills, knowledge and experience could new directors bring to the oversight of the business?

  • Inform the HMRC that the legal structure of your business has changed. The process can all be done online via the government website. This will register your business for corporation tax.

  • Choose a completely unique name for your business. This can be tricky if you’ve been operating under your own name and your name is reasonably common. To find out if your name is available check the Companies House Register.

  • Register your business with Companies House. This can again be done via the government website. To do this you’ll need to create your memorandum and articles of association. A memorandum of association is a legal document which all the shareholders need to sign, agreeing to set up the company. Articles of association are the rules by which shareholders, directors and the company secretary agree to run the company.

  • Set up a new business bank account that takes account of your Limited Company status.

  • Inform your insurer that your legal structure has changed.

The whole process is relatively straightforward but not without pitfalls. Taking things slowly and methodically can ensure you don’t have any issues.

Conclusion

Moving from Sole Trader to a Limited Company is always a big moment in the development of a business. It can be the catalyst to future growth and gives the business owner a new credibility and professionalism. It also brings with it key tax benefits. Corporation Tax currently stands at 19%. It also allows you to access new sources of finance to help grow your business.

At One Click Accountant, we’ve helped Sole Traders move to Limited Company status. Our specialist Limited Company accountancy services can advise if the timing is right, what benefits it might bring and how to go about making the transition.

We can also offer ongoing fixed-fee accountancy services to help free up your time,  improve your decision making and increase your chances of success.

Why not call us on 0330 124 4675 or use our online contact form to find out how we can help?

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