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From Sole trader to a limited company
3 min read

From Sole Trader to a Limited Company

What to expect from incorporating your business.

Sole trader standing on the left holding a laptop. Outside of a limited company building.

With a new tax year almost upon us, many sole traders will be reviewing their business structure and considering whether it’s worth switching to a limited company.

If you’re a sole trader who has weighed up the pros and cons and decided to form a limited company, here’s what you need to know to complete the transition.

Starting point

As a sole trader, there’s little distinction between you and your business so it’s important to know that moving to a limited company will mean your business becomes its own legal entity.

Before you stop working as a sole trader, you should settle on a unique name for your company (one that is not being used by another company) and on the following details:

  • a standard industrial classification of economic activities (SIC) code
  • a memorandum of articles and association
  • a people with significant control (PSC) register, such as someone who holds a 25% stake in your company or has voting rights.

You will need these details when the time comes to register your organisation with Companies House, and to register for corporation tax with HMRC.

Company bank account

If you don’t already have a bank account set up in the name of your business, setting one up in the name of your limited company is usually one of the next steps to take.

This will make it easier for you to handle the more complex and often time-consuming accounting processes involved after you’ve started trading as a limited company.

It would also be wise at this stage to look into hiring an experienced accountant, who can work with you to potentially reduce your tax liabilities further down the line.

Once the company bank is setup, making sure your company finances are under control should be at the top of your priory list. From raising sales invoices, paying staff and storing all receipts. We recommend using an accountancy software called Xero. Here at eAccounts, we offer the software free of charge to all clients and also include the setup process of your account at no additional cost.

Contact HMRC

You should let the Revenue know at the earliest opportunity that you’ve stopped, or when you intend to stop, working as a sole trader. Depending on when you cease working as a sole trader, HMRC will expect you to file a tax return under self-assessment for the rest of the year and possibly the previous year.

You may then have to submit tax returns the following year as a director and shareholder.

It’s worth bearing in mind that the cost of challenging the Revenue’s opinion on whether or not a director should submit a tax return will usually exceed the cost of completing a tax return.

Register with Companies House

The next step is to register – either online or through the post – with Companies House, which deals with incorporating new companies and dissolving existing ones.

You will need your company name, a company address, and at least one director and shareholder.

You’ll also require details, including your SIC code, your memorandum of articles and association, and your PSC register.

Once you have these details, you pay £12 to register online with Companies House and the process can take up to 24 hours to complete. Postal registrations can take up to 10 days and cost £40, although a same-day service is available for £100 so long as the application is received before 3pm.

In both cases, send a cheque made payable to Companies House along with a completed form IN01 to register, and send your application to the address on the form.

Your company can then begin actively trading once it receives a certificate of incorporation.

For more information on how eAccounts can help you with your business structure. Contact us on 02921 056209. Alternatively, email us admin@e-accounts.co.uk

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