Changing from sole trader to limited company

This article covers what you may need to consider as well as the practical side of becoming a limited company, including: 

• Whether you should change from sole trader to limited company 
• Are you ready to change to a limited company 
• If you do change, when is the right time 
• How will it change your business 
• What are the implications 

Why change from a sole trader to a limited company?

Changing to a limited company will provide some level of protection for you as an individual by reducing your liability. Becoming a limited company will protect your personal assets. 

A limited company pays corporation tax. The corporation tax rate differs from the income tax rate. Directors of the company will suffer Income Tax on any money taken out of the company via salary or dividend. This enables better tax planning opportunities and potentially a lower tax liability as a result. 

Being a limited company may increase your business' credibility in the market, or you may just want to protect your business name as your brand grows. 

Limited companies have greater borrowing power. To borrow money or apply for credit you may be able to borrow more as a limited company. 

How to become a limited company

If you are unsure if it is the right decision or time to switch from being a self employed sole trader to a limited company speak to us, we have lots of experience in this area and can go through all the pros and cons specific to you and your business.

Extra responsibilities come into play when changing from a sole trader to a limited company, such as submitting annual financial accounts to Companies House and managing the company’s resources and finances. These additional responsibilities need to be considered carefully before making the change.

To make it as straightforward as possible when becoming a limited company, a checklist will help. A checklist will prompt you to: 

• choose a company name 
• choose directors 
• decide roles within the company 
• preparing the necessary documentation. 

A step by step list can be found on the Government website.

Choose a company name

You may wish to use your sole trader trading name as your limited company name or you may wish to create a new company name. 

Finding the right name for your company has the potential to impact how successful your business could be. You must follow these rules for picking a company name: 

• can't be the same as another registered company's name 
• can't be offensive 

If your name is too similar to another company or trademark, you might need to change it if someone complains. 

Other things to consider are: 

• Avoid hard to spell names 
• Keep the name simple 
• Select a broad name that can encompass business growth 

You can check to see if your name is unique using the Companies House Web Check Service. 

Learn more about rules in choosing your company name, visit the Government's website here.

Choose directors and decide on other roles

You must appoint a company director when you incorporate a limited company. 

Company directors are legally responsible for running the business and making decisions for the benefit of the company. They are also legally responsible for the company’s records, accounts and performance. All directors must be over the age of 16 years and do not have to live in the UK. 

If the company is limited by shares, you must appoint at least one shareholder. A shareholder can also be a director of the company. Shareholder(s) will have certain rights in the company, and there may be more than one share class. Different share classes may have different rights attached to them. 

If the company is limited by guarantee, you must appoint at least one guarantor. The guarantor are company members who control the company. Look at the Government website here for further guidance. 

You must maintain a register of People with Significant Control (PSC) in your company. Most PSCs are individuals who: 

• hold more than 25% of shares 
• hold more than 25% of voting rights 
• have the right to appoint or remove the majority of the board of directors 

You must report changes in the PSC register to HMRC within 14 days, and to Companies House within a further 14 days. Learn more about PSCs here.  

Prepare the necessary documentation

Now we come to what documents you need to prepare for your newly formed Limited Company. On registering your company, these form part of the registration process:

• A Memorandum of Association – this is a legal statement signed by all initial shareholders or guarantors. It will provide the structure of the company, such as the directors, PSCs, trading activities.
• Articles of Association – this document will detail the rules agreed by the directors, company secretary and shareholders with regards to the running of the company.

These basically have all the rules the company must follow but also list who runs and owns the company and can even be tailored to suit any specific needs. These could become complex, so always seek professional advice from your accountant before setting up your company so we can ensure you have the right documentation in place.

Like any business you will need to keep records, there are two types: company and accounting records.

• Company records – details about the company and statutory documentation such as the memorandum of association 
• Accounting records – details of all the company’s financial transactions, annual accounts and company tax return 

You must keep your accounting records for six years from the end of the last company financial year they relate to.

Preparing company accounts and a corporation tax return are very complex compared to sole traders. There are specific rules you must follow, and they must be submitted in a set format.

Most people prefer an accountant to put these together for them. We specialise in limited company accounts and tax and are perfectly placed to prepare these for you. We will ensure you are compliant and you get all the reliefs available to you. 

Register your company with Companies House

Once you register a limited company with Companies House, the company legally exists. Details about the company will be available on the public register. 

Once the company successfully incorporates, you will receive a certificate of incorporation. You should keep this safe with your company records. You may need to show this document when opening a business bank account or applying for finance. This document is used to prove the company's identity. 

Setting up a limited company involves many steps. TaxAssist Accountants can help make sure it is done correctly through our intermediary. 

How long does it take to set up a limited company?

Provided you have all the required information to hand, the process is very quick. Setting up a limited company online should take 24 hours but slightly longer if you go for the postal option, which takes eight to 10 days.

Is it a legal requirement for a limited company to have a bank account?

It is not a legal requirement to open a business account for your limited company but it is strongly advised that you do as the money belongs to the company and not you so you must keep it separate. Keeping it separate from your personal finances provides a professional image and you will find that clients prefer making payments to a business account. Keeping your business' finances separate from your personal ones will make reporting to the HMRC much easier. As your business expands, you might in the future wish to apply for a business loan or business credit card – having a business account is a necessity for this.

Do your research on business accounts, as there are many out there providing different features, such as free business banking, overdraft facilities. It is relatively easy to open the account, providing you have the required information at hand:

• Personal ID and proof of the address of the directors
• Memorandum and Articles of Association
• Certificate of Incorporation

After you have made an appointment at your chosen bank, it may take around three weeks for the account to be up and running.

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

Setting up a very simple limited company would cost you around £200-£300 plus VAT. However, if a more complex set up is required it would cost more.

Using an accountant will ensure your company:

• is set up correctly;
• has the correct memorandum and articles produced;
•  is registered for Corporation Tax;
•  is set up how you want it.
• formation isn't rejected

Your accountant will explain in detail what being a limited company means so that you understand your obligations and what other factors you will now need to consider.

How do I transfer property ownership to a limited company?

Transferring property ownership is complex and your individual circumstances will determine whether this is the right course of action for you. We recommend you speak to an accountant to go through the details. 

How TaxAssist Accountants can help

To help you decide whether to make the switch from the sole trader to limited company and support you through the transistion, we offer a free, no obligation consultation and would be happy to discuss the next steps. To book your initial meeting call 0800 0523 555 or use our simple online enquiry form.

Last updated: 3rd April 2024