Sole Trader to a Limited Company

by | 22 Mar, 2022

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Can we convert Sole Trader to a Limited Company entity?

 There are quite a few key differences between a business being registered as a sole trader compared to a limited company. Sometimes, business owners may wish to convert from one to another. This article will explain how that’s possible and the key things you need to do to successfully convert from a sole trader to a limited company!

Don’t forget to check out the short video on the bottom of the page

Is it possible?

For the record – yes, your business absolutely can convert to a limited company even after you’ve registered as a sole trader. It’s a natural process that occurs for most business owners. You just need to follow the correct guidelines according to revenue and customs laws, which we will touch on in a moment.

Why might you want to convert your sole trader to a limited company?

We have an article on our website already detailing the differences between a sole trader and a limited company, but we’ll run over some of the basics here for the sake of context.

A sole trader is the name for a business that is owned and controlled by only one individual. Legally, there’s no distinction between you and your business. This means that you personally have total liability for any losses, debts or legal issues that are incurred as a result of business. While being a sole trader has other handy benefits, the unlimited liability is a very significant flaw, and one that eventually convinces people to convert to a limited company.

A limited company is a business owned by multiple shareholders and managed by more than one director. The same people can be both shareholders and directors, meaning you have the opportunity to own and control the business like you would as a sole trader, but with one key difference – you have limited liability. If there are problems with the business, it now becomes the responsibility of the whole company, which HMRC will see as separate from you as a person. Great! Of course there are some disadvantages, but trading as a limited company is generally the better option for those with growing businesses.

How can a business convert?

There are some steps that you must take in order to set your limited company up properly. They are as follows:

  1. Register your limited company

You need to register a limited company before you do anything else. A very popular and inexpensive way of doing this is through an approved company formation agent. The process is quite straightforward and most of the application is conducted online and approved within a few hours of completion.

To register your company online, make sure you have:

  • A unique company name (it’s important to note that while you can use your company name from your time as a sole trader, you have to make sure it isn’t being used by another limited company. You can easily check this for free online!)
  • A registered office address
  • One or more directors and one or more shareholders
  • An address for each direction and shareholder that you list
  • An SIC code and a mention of the nature of your business and the expected activities
  1. Contact HMRC and inform them of the change

As with all business dealings, it’s very important to let HMRC know that you are planning to convert. This means letting them know you have ceased trading as a sole trader and have registered as a limited company. There’s a form you have to fill out on their website which is straightforward enough, which will ask you for your:

  • Name
  • Date of Birth
  • Address
  • The nature of your trade
  • National Insurance Number
  • Your Taxpayer Reference (UTR)
  • The date on which you ceased being self-employed

Make sure to send your final self assessment tax return by January 31st at the end of the tax year as well!

  1. Transferring your sole trader business to the limited company

You may possibly need to transfer any existing business assets to your new company. Depending on the type of business you had, these may vary. You should be aware of possible tax changes at this stage – transference of assets can trigger increases in capital gains tax. We strongly encourage seeking out the advice of an accountant or professional for advice in this area, something we can offer at Cubed Consultancy with a free consultation call.

  1. Business bank account

A brand new business bank account is the best option to separate your personal and business finances. There is no legal obligation to do so, but it is easier to work with!

  1. Notify any stakeholders

Anyone who has interest in your business will need to be informed of the change, regardless if the name changes or not. This includes the likes of employees, clients, banks, service providers, landlords and debtors.

  1. Registering the company for Tax

When your company has been registered, you will receive a letter at your registered address from HMRC. This will inform you of your tax obligations and give you a unique taxpayer reference (UTR). Within 3 months, you must register your company online for corporation tax, and if you think your taxable VAT for a 12-month period will be over £85,000, you should register the company for VAT as well. If your sole trader business was also registered for VAT, this should be cancelled within 30 days of converting the business.

Phew. One last point: if you are to receive a director’s salary and have employees to pay, you also need to register as an employer and set up Pay As You Earn (PAYE) before the first payday.

There are a lot of things to remember to do when changing from a sole trader to a limited company, but many of them are straightforward and beneficial to the growth of your company. Hopefully this article has clued you in a bit more about the process. If you have any other concerns or questions, then please get in touch with us here at Cubed Consultancy.

We are a Hertfordshire based consultancy company headed by two chartered accountants, Mark and Richard. With years of financial experience between us, we work closely with all types of clients, whether they are individuals or businesses, in order to tailor to everyone’s unique financial needs and requirements. Get in touch with us today and book a free consultation call via our website!

Related Article that may be of interest to you : Sole Trader vs Limited Company (The Startup Delimma)

Mark
Mark Munnelly
Mark is a Chartered Accountant with a career spanning 18 years with both top 10 firms and independent accountancy practices. His expertise covers all accounting disciplines and passion is partnering with clients to reach their business and financial goals, even under the most challenging conditions. He is Co-Founder of Cubed Consultancy. Today, Cubed have got 100's of clients from sole traders, charities and larger multi-site businesses. Feel free to click book a complimentary consultation session by click here or on the Consultation button above.
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