How to Make the Switch from Sole Trader to Limited Company.

INTRODUCTION: -Sole Trader to Limited Company.

As a sole trader, you are the owner and sole director of your business. This means that you are personally liable for all debts and losses incurred by the business. In contrast, a limited company is a separate legal entity from its owners and directors. This means that the company – not the individuals – is liable for any debts or losses incurred.

There are several reasons why you might want to switch from sole trader to limited company. For example, you may want to protect your assets from business debts, or you may want to raise investment capital by selling shares in the company.

The process of switching from sole trader to limited company is not as complicated as you might think. In this article, we will outline the key steps that you need to take to make the switch.

Why makes the changes in Sole Trader to Limited Company.?

There are so many benefits of switching from sole traders to a limited company

As a sole trader, you are the owner and sole director of your business. This means that you are personally liable for all debts and losses incurred by the business. In contrast, a limited company is a separate legal entity from its owners and directors. This means that the company – not the individuals – is liable for any debts or losses incurred.

There are several reasons why you might want to switch from sole trader to limited company. For example, you may want to protect your assets from business debts, or you may want to raise investment capital by selling shares in the company.

The process of switching from sole trader to limited company is not as complicated as you might think. In this article, we will outline the key steps that you need to take to make the switch.

1- Fortify your business name

As a sole trader, your business name isn’t protected. Even if you’ve built up a strong reputation for your brand and own the website domain, there’s nothing stopping someone from using your business name. When you become a limited company, you will register your business name with Companies House. Once you’ve registered your limited company, nobody else can use your business name.

As well as protecting your company name, becoming a limited company can also save you money. If somebody else uses your name, you’ll need to spend time and money rebranding. Registering as a limited company can prevent you from having to start your business from scratch. Use our company name checker tool to determine if your company name is available.

2- Enhanced tax efficiency

As a sole trader, you pay tax on all the money your business earns. Your profits are subject to income tax and national insurance. If your business is successful, you’ll end up paying more tax than necessary. Tax efficiency is one of the most major advantages of switching from a sole trader to a limited company.

Registering a limited company can help you pay less tax legally. Limited companies need to pay corporation tax, which is 20% of profits, but this is only on profits rather than the entire income. You can also take a salary and dividends from your business to save on income tax and national insurance payments. As a limited company, you can claim tax relief on business expenses, which you cannot do as a sole trader.

3- Limited liability

As your company becomes more successful, liability becomes a higher priority. As a sole trader, you are held accountable if your business fails or if somebody files a claim against your company. This means that you will pay from your assets if anything goes array or receive a larger tax bill than anticipated.

A limited company protects you from being held personally liable for business losses or customer claims. That is why it’s crucial to have a separate business bank account from your personal one–to safeguard your assets.

4- Increased Credibility and Reputation

When you start a business as a sole trader, there are certain guidelines you must follow regarding what you can name your business – one of which is not being able to use “limited” or “ltd”. Although this may not seem like a big deal, having “ltd” in your business name and being registered with Companies House is a significant indicator of trust for consumers.

UK incorporation
UK incorporation

When customers see that a business is registered as limited, it reassures them that the business is legitimate and trustworthy. You can build your credibility and reputation with new and existing customers by registering your business as limited.

What’s involved in the process in change from sole trader to a limited company UK?

If you wish to convert your current sole trader small business into a limited company, you will need to take the following steps:

1- Register a limited company

The initial step is to register a limited by-shares company. The most prevalent and reasonably priced method to establish a company is by utilizing an approved company formation agent. The process is extremely uncomplicated and is done entirely online; most applications are processed and authorized by Companies House within a few working hours.

To register a limited company online, the following will be required:

-a unique company name

-a registered office address

-at least one director

-at least one shareholder

-a service address for each director and shareholder

-Standard Industrial Classification (SIC) code(s) to describe the nature of your business activities 

Registering an existing business name as a company name is more complicated than for a sole trader. Our free company name checker will tell you whether the name you want is available before you start the application process. 

Notify HMRC of your decision to cease being a sole trader.

Once your new company has been incorporated and you are ready to operate through this business entity, you will need to inform HMRC that you are ending self-employment and will no longer run your business as a sole trader. To do so, you must fill out an online form with the following information:

The date you ceased being self-employed

Your Unique Taxpayer Reference (UTR)

Your National Insurance Number

Your name

Your date of birth

Your address

The nature of your trade 

As a sole trader, you will need to file a final Self-Assessment tax return by 31st January after the end of the tax year. Your income reported on the return should cover your self-employed earnings and tax liability up to the date when you ceased being a sole trader. You may also need to include:

 allowable expenses, including any costs associated with converting your business structure

capital allowances on any sole trader assets transferred to your limited company

Capital Gains Tax (CGT) on any business assets transferred to the company

Switch your sole trader business over to the company.

As a sole trader, you may need to transfer existing business assets (such as property, machinery, equipment, inventory, etc.) to your new limited company. However, your new company probably does not have the funds to pay for these assets outright. The most common solution to this problem is to set up a director’s loan account, which allows the company to pay you (the director) for the transferred business assets over time.

 Transferring some assets may result in a Capital Gains Tax (CGT) liability, which will be based on the market value of the assets.

Open a business bank account under your company’s name.

Sole traders and limited companies don’t need to have business bank accounts, but it is recommended to keep your business finances distinct from your finances. 

Aside from making bookkeeping and accounting simpler, you will also avoid the likelihood of taking money out of the company unlawfully.

1st Formations have partnered with several of the top names in UK banking to offer our customers an excellent selection of business bank accounts, such as Barclays, Cardone, TSB, Counting, Mettle, ANNA, Revolute, and Cash plus.

 Inform those who have a vested interest in the company of the changes to the business model.

You will have to inform several parties whether you register a new company name or keep using your current business name that you have changed the legal structure of your enterprise and will now be operating through a limited company. The people you will need to notify are (if it applies):

– Employees and contractors

– Customers and clients

– Suppliers and service providers

– Banks, lenders, and other finance providers

– Landlords

 

Register your limited company for tax and PAYE purposes.

Companies House will notify HMRC when your new company has been incorporated. You will receive a letter from HMRC at your company’s registered office address within approximately 2 weeks of company formation.

 

This letter will include information about your company’s tax and reporting obligations, as well as your company’s 10-digit Unique Taxpayer Reference (UTR).

You must register your company for Corporation Tax online within 3 months of commencing trading through this new structure. To do so, you will need your company UTR and Company Registration Number ready.

If you anticipate that your VAT taxable turnover will exceed £85,000 in 12 months, you must register your company for VAT.

Alternatively, you may want to register for VAT voluntarily to increase the tax efficiency and status of your company. If your sole trader business is registered for VAT, you should cancel this registration within 30 days of changing your business structure.

Important things to consider while switching from sole trader to limited company.

If you are thinking of making the switch from sole trader to a limited company, there are a few important things you need to consider. While there are many benefits to incorporating your business, there are also a few potential drawbacks that you should be aware of.

let’s take a look at the benefits of incorporation. One of the biggest advantages is that it limits your liability. As a sole trader, you are personally responsible for all debts and liabilities incurred by your business. But as a limited company, your liability is limited to the amount you’ve invested in the business. This can provide valuable protection if your business is sued or incurs debts it can’t repay.

Another advantage of incorporation is that it can make your business more attractive to investors. Limited companies are seen as being more stable and less risky than sole traders.

 Conclusion

If you are a sole trader in the UK and you may want to switch to a limited company. This BLOG provides a brief overview of the benefits of doing so. As a sole trader, you are personally liable for all debts and losses incurred by the business. In contrast, a limited company is a separate legal entity from its owners and directors. This means that the company–not the individuals–is liable for any debts or losses incurred.