Changing from a Sole Trader to Limited Company

Looking for how do you change from sole trader to limited company in the UK? You must be aware that it has significant benefits for your business to carry out business operations as a limited company. This will help to enhance your credibility of the business and tax efficiency. While working in the capacity of a sole trader, it takes a lot of hard work to establish a business in the UK. In today’s comprehensive discussion, we will focus on talking about the differences between a sole trader and a limited company and how to convert from a sole trader to a limited company. So, let us begin to gather more information about this.

 

Sole Trader VS Limited Company – What is the Difference?

Here are the key differences between the structure of a sole trader and a limited company in the UK.

1- Record Keeping and Accounting

Sole traders have relatively simple accounting requirements, with annual self-assessment tax returns and minimal record-keeping obligations. Limited companies, however, must maintain detailed financial records, file annual accounts with Companies House, and prepare a Confirmation Statement.

2- Raising Finance

Limited companies can raise finance through share issuance, loans, and investment. Sole traders rely on personal savings, loans, or alternative funding options.

3- Protection of Liability

Liability protection is one of the main differences between a limited company and a sole trader. The business and sole traders are known to be the same entity. This makes you personally liable for obligations and debts of the business. This is why the assets belonging to you, like home and savings, are known to be at risk. This is in case the business fails and faces financial difficulties. However, a limited company offers protection to limited liability. This helps separate your finances as personal and business finances.

4- Formation and Administration

Setting up a sole trader business is straightforward, with no formal registration required. In the case of limited companies, you must ensure to prepare a Memorandum and Articles of Association, register with Companies House, and issue shares.

5- Credibility

When you are operating business functions as a limited company, your credibility will be enhanced. This case becomes applicable when you are dealing with investors, suppliers, and larger companies.

How Do You Change from a Sole Trader to a Limited Company?

To change from a sole trader to a limited company in the UK, you should follow the steps given in this section.

Step 1: Decide a Name for the Company

• Check availability using Companies House’s name checker tool
• Ensure the name meets UK company naming rules

Step 2: Get Registered with Companies House

• Complete Form IN01
• Provide the required documents
• Memorandum and Articles of Association
• Shareholder and director information
• Registered office address
• Pay registration fee

Step 3: Prepare Memorandum and Articles of Association

• Define company purpose, structure, and rules
• Outline shareholder and director responsibilities
• Specify share capital and distribution

Step 4: Issue Shares and Appoint Directors

• Allocate shares to shareholders
• Appoint directors
• Complete Form AP01

Step 5: Register for Taxes

• Corporation Tax: register with HMRC
• VAT: register with HMRC
• PAYE: register with HMRC

Step 6: Notify HMRC of the Change

• Complete Form CWF1
• Notify HMRC of sole trader cessation
• Provide limited company details

Step 7: Get a Bank Account for Business

• Compare bank accounts for limited companies
• Provide company documents and registration number
• Set up accounting systems and record-keeping

Step 8: Transfer Business Assets

• Transfer assets like equipment, property
• Value assets at market value
• Update accounting records

 

Wrap up

In conclusion, we can say that the process of change from sole trader to limited company in the UK requires attention to detail. Converting from being a sole trader to a limited company in the UK is not a simple process. However, you can pursue the dream of a seamless transition if you focus on getting professional guidance and planning for it mindfully. Your business needs to weigh the benefits before you finally decide to plan and execute for the business.

Disclaimer: All the information provided in this article on change from sole trader to limited company, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.