How do I switch from being a sole trader to a limited company?

Many freelancers become sole traders when starting out in business, seeing this as the right option for them at the time. What happens if you want to form a company in the future?

As with everything, there are pros and cons to both the sole trader and limited company routes.

The best way to work and structure your business depends on your circumstances, which can change.

Becoming a sole trader is the easiest way to start in business, but the limited company route can be more tax efficient.

Importantly, if you want to be a professional contractor, most clients will only hire you if you work through a company.

In this guide, Christian Hickmott, MD of Integro Accounting, explains why switching from a sole trader to a limited company needn’t be an arduous task.

How to switch from Sole Trader to Limited Company

Advice on which structure is best for you

While working as a sole trader can be the simplest option when starting up, generally speaking, once your income exceeds £30,000, carrying out your work through a limited company can be more tax-efficient.

Speaking with a qualified accountant who specialises in small businesses will enable you to give them the full picture of your income and work status so they can recommend which structure is right for you and explain the tax implications.

Setting up and registering a Limited Company

As a sole trader, you and your business are one and the same legal entity, whereas a limited company is an entirely separate legal entity from its shareholders.

You must incorporate a limited company via Companies House, which involves choosing a name and formally appointing at least one director and shareholder.

Read our popular 10-step guide to setting up a limited company.

It’s also important to note the director’s responsibilities, such as preparing and submitting annual corporation tax returns and company accounts.

You can form a new company yourself (directly with Companies House) or through a formation agent, or an accountant can manage the entire set-up process on your behalf.

Advise HMRC of your change in circumstance

As you will no longer be a sole trader (self-employed), you must advise HMRC – you can do this via phone or your online government gateway login.

File your last self-assessment tax return applicable to your sole trader income

In the future, you’ll still need to submit self-assessment tax returns for your personal income from your limited company. However, you’ll need to submit your last one as a sole trader by the usual online return deadline of 31 January.

Are you VAT registered?

If you’re VAT registered as a sole trader, you must cancel your registration with HMRC.

Once your new limited company is set up, you’ll then need a new and separate VAT registration for the limited company, where applicable. If you’re unsure whether your new limited company needs to be VAT registered, you can find out more here.

Payroll and paying your salary

If you had any employees while working as a sole trader, you must close your existing PAYE (Pay As You Earn) scheme and submit the final payroll submissions to HMRC.

You’ll then need to open a new PAYE scheme in the name of your new limited company – even if you don’t have any other employees – as you, the director, will become an employee of your limited company.

Transferring Assets

If you’ve obtained assets relevant to your limited company through your sole trader business, such as equipment or machinery, you might need to transfer them into the limited company name.

The new limited company can purchase these from you where funds are available. However, if there aren’t sufficient funds in the business, your limited company could pay you gradually—this would then become a director’s loan.

There are a few complexities around this, so it’s worth gaining advice from your accountant.

Open a business bank account for the limited company

As mentioned, the limited company is a separate legal entity from yourself; any transactions relating to the limited company must be paid through the company and not you as an individual.

As a result, you need to open a separate bank account in your limited company’s name.

If you’re using online bookkeeping software, don’t forget to enable the bank feed for your new account.

Lastly, remember to communicate the change to clients and stakeholders

Your website, business cards and stationery should reflect your new company details.

Any invoices you issue from now on should be in your limited company’s name.

Notify any suppliers, contractors, and lenders, and check whether you need to change anything, such as your business insurance.

Want to hear from someone who’s been through it themselves?

Here at Integro, one of our clients has shared their experience of switching from sole trader to limited; giving insight from the perspective of someone who’s been through it themselves, even changing back to sole trader again later down the line.