How to switch from sole trader to limited company

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Being a sole trader is the easiest way to start a business.

There are few reporting requirements beyond your annual tax return and you don’t need to worry about things like payroll or corporation tax.

But as your business expands, it might eventually be worth incorporating it into a limited company.

You could gain tax advantages, reduce your liability, and create room for your business to grow.

But what do you need to do to make the switch from sole trader to limited company? And when should you do it?

Here’s what you need to know.

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When to switch from sole trader to a limited company

There are a myriad of scenarios where being a sole trader trumps being a limited company, and vice versa.

Because of this, there are no hard and fast rules around if and when you should make that transition – it all depends on your personal circumstances.

That said, transitioning to a limited company is worth considering if you have consistent income, and especially if your income nudges you into the higher tax bracket.

It might also be worthwhile if you have additional income outside of your self employment profit, whether that’s from property, pension or even a PAYE job.

And then of course you might just want to reduce your liability.

Speaking to an accountant could be helpful here as in some cases using an umbrella company would work just as well.

And if you do decide to incorporate, they may be able to help you make the most of any tax breaks available to you.

Read this: Self employed or limited company: Which is best for you?

How to set up a limited company

Setting up a limited company is surprisingly easy.

All you need to do is pick a company name, decide on your company type, choose your director(s) and secretary, name the shareholder(s), and register all of this information with Companies House.

You’ll need to supply a few details about yourself, such as your National Insurance number, and pay £50.

There are plenty of firms that will do it for you for a lower fee, or even for free if you then pay to use their other services.

Tide* for example charges £14.99 for company formation, while Anna will do it for free if you take out one of their paid plans.

After your company has been registered, you’ll also need to register for corporation tax within three months of the start of trading.

How does the transfer of assets work?

If you’re a sole trader, you’ll probably have equipment used to carry out your self employed work.

This might be physical assets like your laptop or your work phone, but it could also be a digital asset such as a website.

You can transfer all of these into your company.

Eamon Shahir, founder of digital accountancy firm Taxd, explained: “At the point you incorporate, you should take a stock list of all the assets you have acquired in relation to your trade.

“You would look at the market value of these assets at the time of transfer and make a record of this.

“You can then sell these to your company and transfer the actual ownership.”

For lower value assets such as laptops, it might be easier to create a director’s loan based on the market value amount.

However, if there are large value assets like a car, then you’ll need to do a bit more planning.

Having an accountant for this bit is crucial as there could be tax benefits you could take advantage of.

Pitfalls to look out for during the transition

“One of the biggest mistakes that we see is people carrying on with a personal bank account, rather than changing over to a business bank account,” says Lee Murphy, managing director of The Accountancy Partnership.

“Limited companies are separate legal entities to their owners, so it’s essential it has its own separate bank account.

“Another common problem we see is sole traders not transferring assets properly or underestimating how different it will be to report as a limited company rather than a sole trader.

“This is why it’s so important to have an accountant from the get-go, who’ll be able to explain things to you and answer any questions you may have leading up to any tax returns.”

What else can an accountant help with?

“Your accountant can incorporate the business for you with Companies House and help you with things like appointing directors and setting up the share structure of your business,” says Murphy.

They will also be able to look at how you can pay yourself in a tax efficient way, and take into account your other income.

He added: “We can also help you prepare your statutory accounts, file your company tax return and ensure that you’re keeping up to date with deadlines set by both HMRC and Companies House.”

When should you inform HMRC you’re no longer freelance?

“You’ll need to inform HMRC of your change as soon as you’ve stopped trading as a sole trader by submitting one final self-assessment tax return,” says Murphy.

“Once your new limited company is registered properly, Companies House should automatically notify HMRC.”