How do I switch from sole trader to limited company ?

switching from sole trader to limited company

Most business owners start off their business as a sole trader and then decide it is in their best interests to move to a limited company and wonder “How do I switch from sole trader to limited company ?”. We usually get lots of enquiries about this, so if you are a business owner trading as a sole trader and wondering whether moving to limited company is for you, then you have come to the right place, because we thought we would write this article to help you understand the process a little better.

What is the difference between trading as a sole trader and trading as a limited company ?

First things first, let us understand what the difference is between trading as a sole trader and trading as a limited company. A sole trader is self-employed and runs their business alone without any employees. There is no legal distinction between a sole trader and their business. While anyone can start their business as a sole trader, this is a popular choice of legal structure for freelancers, tradespeople and gig economy workers.

A limited company has a different legal structure that sets it apart from obligations specific to sole traders or partnerships. The main difference is that legally the limited company is a different entity from its owner. It must be registered with Companies House — the UK’s official company records keeper. Also, a limited company must keep more detailed records.

There are certain advantages and disadvantages to each of these types of business.

Why switch from a sole trader to a limited company?

As a sole trader all the profits you make are yours to keep, but with this comes the responsibility for the finances of the business. Your personal finances are considered to be the same as the business finances, which means that if you owe money through your business, then you are liable for this debt personally. If something goes wrong, the debts are your responsibility, not the responsibility of the business. As your business grows, there is more risk involved and for this reason many people decide it is best to become a limited company.

Registering your business as a limited company means that there is less risk for you as a business owner. The money you make belongs to the business and not to you personally, so any money owed is business debt not personal debt.

As a director of a limited company you will have additional responsibilities which you wouldn’t have had as a sole trader, so it is important to do your research before making the switch.

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

Making the switch to a limited company from a sole trader is a straightforward process, but it must be carried out properly in all its details. But before you decide to change from sole trader to a limited company, you should seek professional advice from an accountant.

Here are the eight steps you need to take to switch from a sole trader to a limited company.

1. Choose a company name

You may be able to use the same name you have traded under as a sole trader, but it is worth checking. You can use a company name checker to see if your chosen name is available.

This may sound easy and not a very serious matter, but there are certain conditions a limited company name needs to meet.

I. The name must end in limited or Ltd

II. You cannot copy an existing business’s name

III. You cannot suggest a connection with authorities without permission

You can either continue with the business name you had for your sole trader business or you can use the opportunity to rebrand and choose something entirely different.

2. Incorporate your business

To become a limited company you must incorporate your business with Companies House. You can do this online, however if you need support, LAS Accounting Ltd can help you with this.

You can choose to continue trading alone, in which case you will be the company’s only director and shareholder, or you can have other directors join your business. Each director will have a share in the business. Shares cannot be sold to the general public, only to directors of the business.

To register your limited company, you will need:

  • A registered office address
  • A unique business name
  • One director
  • One shareholder
  • A Standard Industrial Classification (SIC) code.

It’s also worth bearing in mind that you can use a virtual office address or a virtual director’s address. Using virtual addresses will keep your home address private from the public.

3. Open a business bank account for your company

A limited company in the UK is legally required to have its own bank account. The benefits of a business bank account include:

  • Track business transactions easily
  • Process salary payments quickly
  • Receive credit and debit card payments
  • Use and receive foreign currencies
  • Carry out credit checks.

Almost every major bank offers business bank accounts, so it is worth doing your research before opening one.

4. Decide the terms and conditions of the limited company

By law you must have set terms and conditions for your business. This helps to prevent any misunderstanding when it comes to your products and services and also gives you some protection. We recommend you seek advice from a solicitor when creating any new legal documents.

5. Inform your existing clients and suppliers

As part of the process you must inform all of your existing clients and suppliers of the change in business structure. As mentioned before, you need to open a new bank account under your new limited company name and you need to make everyone aware of this. If your terms and conditions have changed as part of the process, then these will need to be sent out again to everyone whom they apply to. Any contracts you have with clients or suppliers will also need to be changed to reflect the business now being a limited company

6. Company Assets

You will need to decide if any of your current business assets as a sole trader will be moved across to the limited company. This process can be quite complex, so be sure to seek advice from your accountant.

7. Update Insurance Policies

Be sure to let your insurance providers know about your business structure change. Even though your business is now limited, as a director you can be held personally responsible if things happen to go wrong. You may decide to invest in additional insurance such as directors and officers insurance to protect you.

If you are considering becoming a limited company and would like some assistance please get in touch. We can advise on the process and ensure it is the right decision for you. After that, we will handle getting your limited company registered.

8. Inform HMRC of the change

You need to notify HMRC that you are now working as a director and that you are not working as a sole trader anymore, as your tax payments will change.

How can LAS Accounting help you ?

“How do I switch from sole trader to limited company ?” is a legitimate question that may have been on your mind for some time. We are here to support your growing business in any way we can so that you could start turning your dreams into a reality. Get in touch with us if you need help navigating the complexities of switching your business from sole trader to limited company. We would be more than happy to help.

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