How do you transfer from being a sole trader to a limited company?

How do you transfer from being a sole trader to a limited company?

Changing from a self employed sole trader to a limited company can have several advantages.

For a start, it confers limited liability and protects your personal assets as well as offering certain advantages such as offsetting capital gains tax. The good news it’s a relatively simple process to transfer from one entity to the other.

Here is a quick step-by-step guide:

  1. Choose a unique name for your limited company. Ensure that it is not already registered by checking the Companies House register.
  2. Decide on a registered office address for your limited company. This will be publicly available on record when you complete your application.
  3. Determine who will be the directors and shareholders of the limited company. You can have multiple directors and shareholders, including yourself. It can be just you on your own.
  4. Prepare the Memorandum and Articles of Association, which outline the company’s constitution and internal rules. You can use standard templates or seek legal advice for more complex requirements.
  5. Register your limited company with Companies House. You can do this online or by using paper forms. Provide the required information, such as the company name, registered office address, director details and share capital.
  6. If your business is VAT registered, you will need to notify HM Revenue and Customs (HMRC) about the change in legal structure. You may need to cancel your existing VAT registration and re-register the limited company.
  7. Inform HMRC about the change in legal structure and update your tax records accordingly. You will have to close your sole trader tax account and register for corporation tax as a limited company.

What considerations should you make when transferring to a limited company?

You need to understand the legal and financial implications of the transfer before you decide to head down this route.

There won’t be just a beneficial impact on your personal liability but also your tax obligations, accounting practices and even regulatory requirements depending on the sector you work in.

While limited company status can be more tax efficient, there’s also more work to do when putting your accounts together. Sole traders generally have less to do in the way of bookkeeping and calculations.

How the change in legal structure will affect your personal tax liabilities and the tax position of the business is important. Look at factors such as corporation tax, income tax (which you’ll need to pay as an employee), VAT and National Insurance contributions to determine if this is the most efficient way to structure your affairs.

You’ll also need to evaluate your business assets, liabilities, and debts. You will have to determine how these can be transferred to the new limited company and what this will mean for their management. You might need to carry out a proper valuation of the business, produce documentation and introduce compliance measures.

How to prepare the necessary documentation to register your company

To change from a sole trader business and register a limited company in the UK, you will need to prepare and submit certain documentation.

These include:

  1. Memorandum of Association: This outlines the company’s name, registered office address, and its objectives (the purpose for which the company is incorporated). The memorandum can be a standard template or customised.
  2. Articles of Association: These define the internal rules and regulations for the company’s governance and operations. You can use the model articles provided or create your own bespoke ones.
  3. Form IN01: This is the formal application form for the incorporation of a company. It includes details such as the company name, registered office address, details of directors and secretaries (if applicable), shareholders, share capital, and a statement of compliance. The statement of compliance confirms that the company meets all legal requirements for incorporation.
  4. PSC Register: This records individuals or entities that have significant control or influence over the company. It includes details such as their name, address, nature of control, and the date of becoming a PSC.
  5. Statement of Capital: This provides details of the market value, including the company’s issued shares, their classes, nominal value and any paid or unpaid amounts.

What administrative and financial changes are required for transfer?

You will need to change, for example, how your new company appears online and make various administrative changes, including a separate bank account for the limited company and notifying HMRC that you have changed status.

The biggest financial change is that you will no longer be paying income tax as a sole trader but as a business – that will include corporation tax. You will pay yourself a salary, of course, so that means you will also need to pay income tax.

You have an obligation to produce annual tax returns for the business that has to be submitted to Companies House.

What assets and liabilities will need to be transferred?

Assets such as machinery or tools will need to be transferred from you as a sole trader to the limited company. This can include intellectual property such as patents and trademarks.

Other elements, such as loans relating to your business, may also need to be transferred.

Liability in the limited company lies with the business itself and not you as it did as a sole trader. Most businesses have tangible as well as less obvious assets, and it’s a good idea to work with a professional team to make sure your new limited company is covering all the bases.

Changing from sole trader to limited company

Switching from a sole trader to a limited company has several advantages. The first is a limited liability which is transferred from you as an individual, so your personal assets are not at risk. There are also tax advantages to take into account that can help you reduce your liability.

Of course, having limited company status rather than being a sole trader makes you look more ‘professional’ and can help in gaining funding opportunities. On the downside, tasks like accounting can be more labour-intensive for limited companies compared to sole trader status.

Get help with your new company accounts

It’s important to work out whether staying as a sole trader or changing to a limited company is best for your business. Issues such as how you claim tax relief and personal finances can be improved but not in every circumstance.

One of the things that you do need to get right if you do decide to go limited company is your annual accounts. The good news is that the accounting team at VW Taxation has a lot of experience helping newly incorporated companies get off to the best of starts.

Want to find out more? Contact us today.

Conclusion

Changing from sole trader to limited company is a big step but not a difficult one. The process of registering your business is relatively easy.

You need to take into account, however, whether this is the best option for your business and if it offers the best tax efficiency. That’s why it’s a good idea to get professional advice before you take the step.

If you’re interested in becoming a limited company, check our guide on how to run a limited company here.

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Picture of Gary Ellis | Director | VW Taxation
Gary Ellis | Director | VW Taxation

VW Taxation are self employment tax specialists based in Portsmouth. We specialise in tax accounting for contractors, limited companies and the self-employed.

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