If you currently have a sole trader business, you can incorporate into a limited company
Incorporating your sole trader business into a limited company can be a strategic decision for long-term growth, tax efficiency, and legal protection. Here are the steps on what you need to consider for incorporating your sole trader business.
1. Decide on a Company Name
When incorporating, you’ll need to choose a unique company name that’s not already in use by another UK business. You can check name availability using the Companies House name search tool. Ensure the name is:
- Not too similar to existing company names.
- Compliant with naming rules (e.g. no offensive words).
Your company name will need to end with “Limited” or “Ltd” to indicate that it is a limited company.
2. Appoint Directors and Shareholders
To form a limited company, you need at least one director and one shareholder (often the same person if you’re the sole owner).
- Directors: Responsible for managing the company and ensuring legal compliance.
- Shareholders: Own the company by holding shares (even if you’re the sole owner, you’ll issue yourself shares).
- You’ll need to provide the full name, address, date of birth, and nationality of each director and shareholder.
3. Allocate Shares
Decide how many shares to issue in your new limited company. You may issue yourself 100% of the shares if you are the only owner. However, if you’re bringing in partners or investors, you’ll need to allocate shares accordingly.
4. Prepare Memorandum and Articles of Association
The Memorandum of Association is a legal document that all shareholders must sign, agreeing to form the company. The Articles of Association set out the rules for how the company will be run, such as voting rights and how decisions are made.
- You can use the standard template from Companies House or create your own custom articles if needed.
5. Register the Company with Companies House
You must officially incorporate your business by registering with Companies House. The process involves:
- Filing Form IN01 (company registration form).
- Submitting your Memorandum and Articles of Association.
- Paying a registration fee
This can be done online through the Companies House website or through an accountant or company formation agent.
Once registered, you’ll receive a Certificate of Incorporation, confirming that your company legally exists.
6. Inform HMRC
You need to notify HM Revenue & Customs (HMRC) that you’re moving from being a sole trader to running a limited company. This involves:
- Deregistering as a sole trader by contacting HMRC and ceasing your Self-Assessment registration as a sole trader.
- Registering the limited company for Corporation Tax within 3 months of starting to trade through the company.
- Registering for VAT (if applicable) and PAYE if you plan to pay yourself or any employees a salary.
7. Set Up a Business Bank Account
As a limited company is a separate legal entity, it requires its own business bank account. Open a new account in the company’s name to manage income, expenses, and tax obligations. This is essential for maintaining a clear separation between your personal finances and the company’s finances.
8. Transfer Assets and Contracts
As part of the transition, you’ll need to transfer any assets, contracts, and agreements from your sole trader business to the limited company:
- Business Assets: You can transfer physical assets (equipment, stock, vehicles) into the limited company, which may involve selling them to the company. Keep records of the transfer for tax purposes.
- Contracts: If you have existing contracts (with suppliers, clients, etc.), you’ll need to renegotiate them or novate (transfer) them to the limited company, ensuring all stakeholders are aware of the change.
- Bank Loans/Leases: If you have business loans or equipment leases as a sole trader, check if these need to be transferred or renegotiated with the lender.
9. Manage Your Personal and Business Income
Once incorporated, you’ll need to separate your personal income from the business. As a company director, you have multiple options for drawing income:
- Salary: Pay yourself a salary through the company’s PAYE system. This salary is tax-deductible for the company.
- Dividends: As a shareholder, you can also pay yourself dividends from the company’s profits, which are taxed at lower rates than salary.
Tax Planning Tip: Many directors take a combination of a small salary (up to the personal allowance limit) and the rest in dividends to optimize tax efficiency.
10. Understand Tax Implications
As a limited company, you will now be subject to different taxes compared to being a sole trader:
- Corporation Tax: You will pay corporation tax on the company’s profits (currently 19% for most small businesses and 25% for businesses making larger profits).
- Dividends Tax: You will pay tax on any dividends you receive, though dividends are taxed at lower rates than income.
- Personal Income Tax: If you pay yourself a salary, you’ll still be liable for personal income tax and National Insurance contributions (NICs) on that income.
- VAT: If your business turnover exceeds the VAT threshold (£90,000), or you’re already VAT-registered as a sole trader, you’ll need to register the limited company for VAT.
11. Maintain Accounting and Legal Compliance
Running a limited company requires stricter accounting and legal obligations than a sole trader business:
- Annual Accounts: You must prepare and file annual accounts with Companies House.
- Confirmation Statement: Submit a confirmation statement annually to confirm the company’s details (e.g. directors, shareholders).
- Corporation Tax Return: Submit a corporation tax return to HMRC annually.
- PAYE and Payroll: If you’re paying yourself or employees, you’ll need to operate a payroll and submit PAYE returns to HMRC.
Consider using accounting software (e.g., QuickBooks, Xero) or hiring an accountant to help manage the additional accounting and compliance responsibilities.
12. Consider Professional Help
Incorporating a business can be a complex process, and professional help from an accountant or company formation agent can ensure the transition is smooth. They can assist with:
- Choosing the most tax-efficient structure.
- Completing the incorporation paperwork.
- Ensuring compliance with accounting and legal requirements.
Conclusion Incorporating your sole trader business into a limited company can provide significant tax benefits, legal protection, and opportunities for growth. However, it also comes with additional responsibilities and regulatory obligations. Careful planning and professional advice will help you navigate the transition and take advantage of the benefits of operating as a limited company.
If you need any assistance with transitioning from a sole trader into a limited company, or would just like to speak to an expert to find out your options, please feel free to get in touch and our accounting specialist Elliott for a free, no-obligation initial consultation.
