3 simple steps to switching from a sole trader to a limited company

Thinking of switching from a sole trader to a limited company? If your self-employed business is booming and you're looking to take that next step, it could be the right time to switch to a limited company structure to support your business as it grows.

You might consider switching to a limited company for tax purposes, to look more professional, or to appeal to potential investors. Whilst owning a limited company comes with more responsibility, it also comes with more freedom. As a limited company owner, you'll have more legal requirements, paperwork, and annual accounts to file, but you'll also have the potential to reduce your tax bill and increase your take-home pay. Every cloud!

Before you make the switch though, it's worth getting clear on the key differences between a sole trader business and a limited company structure and weighing up which one feels right for your own circumstances.

As a sole trader, there is no legal distinction between you and your business, whereas a limited company has its own legal identity separate from the people who run it. It also has separate finances from your personal ones, shares and shareholders, and is subject to Corporation Tax on its annual profits. (As a limited company director, you'll still have to submit a self assessment tax return.) Since the business is its own legal entity, switching to a limited company structure means you are no longer personally at risk if you run into financial difficulties.

There might be more responsibility running a limited company, but switching to a limited company from a sole trader is a lot easier than it sounds.

Here are the steps to follow to make it simple and hassle-free.

1. Register your limited company

First thing's first, you'll need to register your new limited company with Companies House. You can do this online at a fairly low cost (roughly between £12- £50– depending on whether you want all the bells and whistles).

When registered you’ll get a ‘certificate of incorporation’ which confirms the company legally exists and shows the company number and date of formation.

You can register your company online with Companies House for £12, register with a company formation agent, or have your accountant take care of the process for you.

You'll want to check the company name you've chosen is available first.

To register your new limited company, you'll need the following details:

  • Your registered office
  • Your new company's business activity
  • Director's details
  • Shareholders' details

2. Tell HMRC that you're stopping self employment

Now that you've registered your business, it's time to let HMRC know that you're planning to stop trading as a sole trader.

You can do that by filling out an online form with your personal details and the date on which you stopped being self-employed.

You'll also need to file a final tax return before 31 January. This should include your trading income, your allowable expenses, capital allowances, and Capital Gains Tax.

3. Set up a business bank account

Owning a limited company comes with a lot more responsibilities than operating as a sole trader. Your business is now a distinct legal 'person' separate from you as the owner, which means all income generated belongs to the company until it is transferred to you.

So getting your ducks in a row with your cash and setting up a separate bank account for your business if you don't have one already is an absolute must.

Here at Complete, we’re big fans of online banks like StarlingTide and Revolut. You can set up a business account on your phone in minutes and instantly have an account number, sort code, and access to online banking. 🙌

Setting yourself up for success

Best practices to help your new business succeed:

  • Have a good accounting setup. We'll admit it's not the most exciting or glamorous part of owning a business, but this makes life so much easier when it comes to record-keeping and annual reporting, both of which are an absolute must for limited companies!
  • Have a strategy for managing cash and keeping on top of your budget. Even the best businesses can fall down if they're not underpinned by enough cash to survive knock-backs and sustain growth. Take a proactive approach to managing your business's cash flow.
  • Regularly set the time aside to do your bookkeeping. We see so many businesses running into problems because they don't have a handle on the books. Use an app like Dext (formerly Receipt Bank) to record expenses as and when they're purchased.
  • Remember why you started. Knowing what you stand for and leading with your values will help you stand out from the crowd, attract like-minded people, and most importantly, help you grow your business with purpose.


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