If you’re registered as a sole trader and thinking about becoming a limited company, you’re not alone. The UK currently has over three million sole traders, many of which go limited in the future. Most entrepreneurs and freelancers start as sole traders and incorporate their businesses later. But making the switch from sole trader to a limited company can be a daunting task. Companies House isn’t the easiest site to understand or navigate, and there are concerns about personal finances.
But the good news is that it’s a step that helps protect you and your business in the long run. Becoming a limited company helps keep your business and personal tax separate as the business has its own legal identity. It also lets you claim tax relief on business expenses and gives you limited liability over any company debts.
Switch from Sole Trader to Limited Company Today
Are you thinking of switching from sole trader to a limited company? If so, you’re in the right place. This guide will outline the steps you need to take to make the switch. We’ll also look at the benefits of registering a limited company and provide tips on making the process as smooth as possible. Find out how to make the switch now.
What’s the Difference Between a Sole Trader and a Limited Company?
When you start your own small business and become self-employed, you need to choose a company legal structure. While several options are available, most new companies begin as sole traders or limited companies. We’ve outlined the differences between the two below.
A sole trader is self-employed and runs their business alone without any employees. There’s no legal distinction between a sole trader and their business. While anyone can choose to be a sole trader, it’s a popular choice of legal structure for freelancers, tradespeople and gig economy workers.
Read our complete guide to becoming a sole trader.
Limited companies have different structures and obligations to sole traders or partnerships. They must register with Companies House — the UK’s official company records keeper and keep more detailed records. A limited company is a separate legal entity from its owner(s), which means directors have limited liability.
Discover everything you need to know about limited companies in our expert guide.
The Benefits of Changing from Sole Trader to Limited Company
Making the decision to change from sole trader to a limited company is a big one. It can be challenging for self-employed people to work out when the right time to make the change is. Maybe you’re making enough profit to make incorporation the best option, or perhaps you’re earning over the VAT threshold. Whatever your circumstances, you’re probably wondering if it’s better to stay a sole trader and not make the switch.
Staying a sole trader is definitely an option, but there are some significant benefits you might be missing out on. Let’s take a look at the benefits of making the switch.
Protect Your Business Name
As a sole trader, your business name isn’t protected. Even if you’ve built a brand reputation and own the website domain, nothing stops someone from using your business name. When you become a limited company, you will register your business name with Companies House. Once you’ve registered your limited company, nobody else can use your business name.
Alongside protecting your company’s name, becoming limited can also save you money. If somebody else uses your name, you’ll need to spend time and money rebranding. Registering as a limited company can prevent you from starting your business from scratch. Use our company name checker tool to determine if your company name is available.
Better Tax Efficiency
Sole traders pay tax on all the money your business makes. Your profits are subject to both income tax and national insurance. If your business is successful, you’ll pay a lot more tax than necessary. Tax efficiency is one of the most significant advantages of switching from a sole trader to a limited company.
By registering a limited company, you can legally pay less tax. Limited companies do need to pay corporation tax which is 20%, but this is only on profits rather than the entire income. You can also take a salary and dividends from your business to save on income tax and national insurance payments. Plus, as a limited company, you can claim tax relief on business expenses which you cannot do as a sole trader.
Limited Liability
As your company grows and becomes more successful, liability becomes a priority. As a sole trader, you are personally liable if your business makes a loss or if somebody makes a claim against your company. This means that you will need to pay from personal assets if anything goes wrong or get a bigger tax bill than expected.
If you choose to switch to a limited company, you won’t be personally liable for business losses or customer claims. This is why it’s essential to have a separate business bank account from your personal one to protect personal assets.
Improved Credibility and Reputation
When you start a business as a sole trader, there are specific rules about naming your business that include not using “limited” or “ltd”. While this might not seem like a big deal, having “ltd” in your business name and being on the Companies House register is a significant trust signal for consumers.
For potential customers, seeing that a business is registered as limited reassures them that your business is legitimate and trustworthy. You can build your credibility and reputation with new and existing customers by registering your business as limited.
Better Borrowing Power and Investor Opportunities
Just as registering as a limited company adds credibility to your business, it opens up new funding opportunities. Being a limited company will increase your chances of finding investors. Going limited implies financial success, and investors will be putting their money into a company rather than an individual.
It will put you in better stead for business loans from banks alongside investors. While you can get business loans as a sole trader, the process is much easier if you are registered with Companies House. Easier access to loans and investment opportunities will make growing your business easier and faster.
Changing from Sole Trader to Limited Company in 4 Steps
Making the switch to a limited company from a sole trader is quick and easy. But before you decide to change from sole trader to a limited company, you should seek professional advice from an accountant or financial adviser.
Here are the five steps to becoming a limited company:
1. Choose a Company Name
Before registering your limited company, you’ll need to choose a business name. You may be able to use the same name you’ve traded under as a sole trader, but it’s worth checking. You can use a company name checker to see if it’s available.
Alongside checking availability, you also need to ensure your company name follows the rules set by Companies House:
- Your name must end in limited
- You cannot copy an existing business’s name
- Your name cannot be too similar to another business’s name
- Your business name cannot be offensive
- You cannot suggest a connection with authorities without permission.
2. Register with Companies House
You can register your limited company once your business name is nailed down. You can do this through Companies House directly, but most new businesses use a company formations agent like Mint Formations. The process is quick and easy, with most applications approved within 24 hours.
To register your limited company, you’ll need:
- A registered office address
- A unique business name
- One director
- One shareholder
- A Standard Industrial Classification (SIC) code.
If you are not planning on bringing on any other directors or shareholders, you can take both positions yourself. It’s also worth bearing in mind that you can use a virtual office address or a virtual director’s address. Using virtual addresses will keep your home address private from the public.
3. Inform HMRC of Your Legal Structure Change
Once your new limited company has been incorporated, you’ll need to let HM Revenue and Customs know that you are stopping trading as a sole trader. This is a quick process and simply requires you to fill out an online form with the following information:
- The date you stopped trading
- Your Unique Taxpayer Reference (UTR)
- Name
- Date of birth
- National insurance number
- Address.
At the end of the tax year, you’ll need to submit a final self-assessment tax return by January 31st.
4. Set up a Business Bank Account for Your Company
At this stage, you don’t technically need to do anything more. But it’s a good idea to set up a business bank account for your new limited company. Businesses aren’t legally required to set up business bank accounts, but it’s a great way to keep your business and personal finances separate.
The benefits of a business bank account include:
- Track business transactions easily
- Process salary payments quickly
- Receive credit and debit card payments
- Use and receive foreign currencies
- Carry out credit checks.
Almost every major bank offers business bank accounts, so it’s worth doing your research before opening one. At Mint Formations, we can help you set up a business account with various banks, including Lloyds, Barclays, WorldPay and Cardone.
If you’re looking to change from a sole trader to a limited company, the easiest way to do it is with the help of Mint Formations. We can advise on the process and ensure it’s the right decision for you. After that, we’ll handle getting your limited company registered.
Register your limited company with Mint Formations today for as little as £12.99. We have 20+ years of experience registering businesses and will handle everything for you. Get in touch if you have any questions about forming your company.
