Transitioning from a sole trader to a LTD company can bring many benefits, from tax savings to a more professional appearance. This guide will show you how to switch from being a sole trader to a LTD company and discuss if making the change is right for you.
The 8 Steps You Need to Take to Change From a Sole Trader to a Ltd Company
8 steps to take
Choose Your LTD Company Name
When you change from a sole trader to a LTD company you’ll need to choose company name.
Your company name must be unique and not similar to any other registered company.
This is easy to do, and a quick search of your proposed name on the Companies House website will show you if it is already in use.
It’s also worth checking the intellectual property office’s website to see if your company name is associated with any registered trademarks. the last thing you want is a legal battle with another company.
Keep in mind that your name must not be offensive or contain swear words. Remember that your LTD company name will be publicly visible at Companies House, so make it as professional as possible.
There are a few more words that you cannot use without permission or the proper accreditation. For example, your company name cannot include words such as Chartered, Bank, Royal, British, English, Scottish, Commission, or words implying professional qualifications that you do not possess.
Here is a complete list of documents pertaining to company naming and what you can and cannot do.
Decide Whether You Want to Be the Sole Director or if You Want to Bring Others on Board
As a sole trader there is no way to separate you from your business activity. When you form a LTD company, your business will be its own entity.
You will issue shares that represent a portion of ownership. This means that there can be multiple owners of your LTD company if you want.
You may want to split the shares between you and a spouse or partner. This can allow you to take advantage of tax allowances that your spouse or partner may not be utilising.
Are you looking for some investment in your company to help it move to the next level? You could issue shares in your company in exchange for a cash injection.
If you want to carry on as have been doing, that’s fine too, you can simply allocate all the shares to yourself and you will be the sole owner of your LTD company.
Register Your LTD Company
The easiest way to register your LTD company is to use a company formation agent. Our list of the best company formation agents in the UK will show the best value options.
Using a Company formation agent has the the following benefits:
Company Formation Agent Benefits
Of course you can register your LTD company yourself, we even have a guide on how to setup a LTD company for free if that takes your fancy.
Set up a Business Bank Account in Your Company Name
Because your LTD will be its own entity, it is important that it has its own bank account. This keeps the LTD company finances separate from your personal funds. You can see our guide on the best business bank accounts for LTD companies to see the best offers available.
Best Business Bank Accounts for LTD Companies
Tide
per month
Starling Bank
per month
Virgin Bank
per month
If you already have a separate bank account as a sole trader, you may be able to convert it to a LTD company bank account.
Just contact them and let them know your LTD Company details and they will tell you what else is required to make the switch.
Tell HMRC That You Have Decided to Stop Being a Sole Trader
Once you’re all setup with your LTD company, you’ll need to let HMRC know that you’ve stopped operating as a sole trader. You can this here.
To do this you’ll need the following information
Once you’ve let HMRC know that you’ve stopped operating as a sole trader, you’ll need to complete a tax return before 31st January.
The income reported on this filing should include all legitimate earnings and any liability incurred up until you stopped being a sole trader. Make sure that you include
Transfer Your Assets to Your Ltd Company
Any assets that you held as a sole trader will need to be transferred to your newly formed LTD company. This can include things like
Usually your newly formed LTD company won’t have much capital, so most people use a directors loan to transfer the assets across and let the LTD company pay off the balance over a longer period of time.
This can trigger a Capital gains tax charge, but there are also some forms of tax relief available, like Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) Incorporation Relief, , or ‘Hold-over’ Relief.
It’s worth speaking with a qualified accountant before undertaking this process if you are transferring lots of assets with a high value, to make sure you aren’t paying more than you need to in tax.
Inform Your Stakeholders That You’ve Changed From a Sole Trader to a Ltd Company
A stakeholder is anyone who has an interest in your business. You will need to let all of them know that you have changed from a sole trader to a LTD company and update them of your new company details. Stakeholders include
Register For Corporation Tax, PAYE and VAT
Once you’ve registered your LTD company, you’ll receive a letter from HMRC containing your unique tax reference number (UTR).
You will need this to register for corporation tax. You can register for corporation tax here.
To register you will need the following information
You must do this within 3 months of trading to avoid receiving a fine.
If your turnover is over £85,000 then you will need to register for VAT. By registering for VAT you can claim back 20% on purchases that you make, but you will also need to charge 20% VAT on your products and services in most cases.
If you are paying yourself a salary then you will also need to register for PAYE.
You will need to run your payroll whenever you pay yourself a salary. Accounting software like Xero, Quickbooks and sage can do this for you, or a qualified accountant can carry out this task.
You can see a full breakdown in our Sole Trader or Ltd Company article. Differences between Sole Traders and Ltd Companies include
Sole Trader
Ltd Company
As a rough guide when you start earning over £30,000 per year, it can be a good time to look at changing from a sole trader to a LTD company
Some people decide to form a LTD company straight away. This may be because there are multiple owners involved, or the owner is looking to raise investment.
It also helps with keeping a degree of separation between personal income and business income. There can be tax advantages too.
A lot of people start out as a sole trader, completing some freelance work as a side hustle, whilst maintaining a full time job.
As the work increases, people make their side hustle their full time gig and this can be a great time to form a LTD company.
Bear in mind that there is additional responsibilities and administration required once your company is incorporated.
Some of the reasons for changing from a sole trader to a LTD company are as follows
Some of the downsides of changing from a sole trader to a LTD company are:
Summary
Switching from a sole trader is straightforward. Using a company formation agent , makes the process even easier.
A LTD company has many advantages including limited liability, tax advantages and a more professional appearance.
However there is more administration and responsibility involved with owning a LTD company over being a sole trader and your accountancy costs will be higher.
