How to make the change from sole trader to limited company

Many businesses begin life as a sole trader and then as they grow, they look to change to limited company to realise the benefits of limited liability.

If you’re thinking of making the switch from being a sole trader to a limited company, then follow our step-by-step guide infographic to help you understand the steps you need to take to make the change.

Step 1 – Understand the differences between sole trader and limited company

Limited company:

• Shares: Typically more people are responsible for the business.
• Team work: More people are involved in the business’ success.
• More help: The government are better equipped to help your business.
• Trust: Studies show customers find limited companies more trustworthy.

Sole trader:

• Liability: As a sole trader you are the business.
• Simplicity: As a sole trader you have 100% control.
• Profitable: The individual keeps the profits.
• Accounts: Sole traders do not file accounts with Companies House.

Step 2 – Incorporate as a limited company

The most crucial step to transfer your business from a sole trader to a limited company is to incorporate as a limited company at Companies House. An account or solicitor can assist you, or you can register a company online.

A limited company requires at a minimum of one director and a secretary. It also has shareholders with limited liability and cannot offer shares to the general public.

As part of the process you need to choose a company name that isn’t already in use. Many people who make the switch want to stick with the same name they’ve been using as a sole trader for brand continuity. However, this isn’t always the case and some people see the switch as an opportunity for a brand refresh, especially if they are adding products and services to their offering.

There are key issues and rules to consider when choosing a company name, find out more in our   which discusses company names.

Step 3 – Clearly set out your terms and conditions

As a new limited company, you should look to protect yourself from any customer uncertainty or misunderstanding. Therefore, you will need to alter your business terms and conditions and clearly explain them to your customers and your suppliers, so they are aware of any changes. A solicitor will be able to help you write your new terms document.

Step 4 – Let your clients and suppliers know of the change

To minimise hassle for your accountant, you will need to inform your clients and suppliers of the change, including:

• Providing them with your new bank details.
• Letting them know your new Terms and Conditions.
• Updating any prior contractual agreements that you have with them.
• Signing a new contract with your company as a counterparty.

Step 5 – Company assets and market value of the company

This step can be a complicated part of the process, so it’s important to get it right. When you form your limited company, you will need to decide what personal assets you want to transfer to the company to establish its market value. It is important to discuss the transfer process with your accountant or with a solicitor. Once you begin operation as a limited company, buying personal assets through the company will affect your company profits and your Corporation Tax liability.

Step 6 – Ensure you’re covered by updating your insurance

Make sure you tell your insurer that you have made the change and are now operating as a limited company as it is likely they will need to amend your business insurance policy.

Despite being part of a limited company, as a company director you can still be held personally liable for your actions if something goes wrong. Therefore, you might want to update your business insurance to include directors and officers insurance (D&O), which provides protection against allegations of mismanagement or wrongdoing by directors or officers. Without D&O, you might need to pay any legal defence costs out of your own pocket if a claim is made against you.

Sources:

https://simply-docs.co.uk/Sole-Traders/What-records-does-a-sole-trader-need-to-keep

https://www.gov.uk/tell-hmrc-changed-business-details/change-to-your-business