If you’re a sole trader and thinking about becoming a limited company to take advantage of the tax benefits and limited liability, then this article will help you understand what is involved and what you need to consider.

Differences between a sole trader and a limited company

A limited company is a separate legal entity, run by the director(s) and owned by the shareholder(s), these can often be the same person(s).

A limited company has limited liability, meaning if the company gets into financial difficulty the owner(s) of the company is not at risk of losing their personal assets. This can only happen in certain situations, such as where personal guarantees have been signed or where the company has been run irresponsibly.

A company is also a separate entity for tax, meaning it has its own accounts and tax returns to file. Please click here for more details on this.

You can also view our tutorial video on what a limited company is by clicking here.

How much more tax efficient is a limited company?

Well to answer this, we have put together a handy calculator, so you can see roughly how much you would take home by operating as a one person company compared to a sole trader

You can view our limited company vs sole trader tax calculator here.

online accountants for limited companies

Incorporating your Limited Company

If you are a sole trader or partnership and have decided to incorporate a limited company to take advantage of a more tax efficient structure, or the limited liability status, then there are a number of things you must do:

1. Incorporate (set up) your company

You'll need to choose your company name, select your start date, notify Companies House and HMRC, appoint a director and pay a set up fee.

We can incorporate your limited company for free if you're one of our clients, saving you up to £120.

2. Select your start date

Choose the date you want to stop trading as a sole trader and start trading through the company. This date is important as the following steps will all be based on the selected date.

3. Open a new bank account

Open a new business bank account for the limited company (using the company name). Having a separate bank account for the business is a must when running a limited company.

4. Notify your suppliers

Inform all of your existing suppliers and any insurers that you are going to be trading through a limited company, and the date that this will start. You may need to complete new supplier agreements through the limited company.

5. Consider any VAT implications

If your sole trader or partnership business was VAT registered you must either apply for a new VAT number or transfer the number across to the new company, which is usually easier to do. We recommend speaking to your accountant about this.

6. Set up your new payroll

If the sole trader or partnership business was an employer then you must apply for the company to become an employer also. The employees should be given P45s by the old business, and then added to the new company payroll (we can handle this on your behalf). You may also need to renew their employment contract to show the new company entity.

7. Change your company information

Change the information on any stationery, such as letterheads and invoices, to reflect the new company details. It is mandatory that the company number and registered office address is displayed on your website and all stationery.

8. Start fresh bookkeeping records

Ensure that you start a new set of records. For example, if you use cloud accounting software such as Pandle, then you will need to start fresh data from the date the company starts to trade and enter the opening balances for any assets being brought over from your sole trader business. Your accountant will be able to help you with this.

9. Review your assets

Decide what assets to introduce into the business. For example, your sole trader business may have a car that you do not want to introduce into the company. If you are a client of ours you will need to inform us if you do not want any assets transferred.

Your responsibilities

Directors have more responsibilities than sole traders, so it is important you understand what these responsibilities entail before setting up your company. Further information can be found here.

Paying yourself

Extracting money from your company is done in a different way to that of a sole trader or partnership. This is typically done through a small salary and dividends (payments to the company owners from profit).

Further information on this can be found in our article here, but we do recommend speaking to your accountant regarding this.

If you have any further questions regarding incorporating your limited company simply phone 020 3355 4047 and our friendly advisors will be happy to help.

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