Once you start a business, the first challenge you will be faced with is choosing the right business structure for it. The most difficult dilemma is to choose between being self-employed or form a company. When the business is in its initial phase, it is easier to carry out as being a sole trader. Later as the business expands, it would be a wise decision, to switch from sole trader to a limited company to avail numerous benefits like limited liability, name reservation, reduced tax rates, etc. only available to a limited entity.
To convert from a sole trader to a limited company, the following steps must be followed:
- Inform HMRC: HMRC needs to be informed about such a change of business structure from sole trader to company. Also, it needs to be informed when the person stops being self- employed. This information can be conveyed to HMRC using the Government Gateway account. One needs to ensure completion of self-assessment tax returns for the final year of self-employment before switching to another business structure.
- Formation of the company: Before transferring a business from sole trader to a limited company, the process of setting up a limited company needs to be carried out. This involves a few legal formalities to be carried out before it comes into existence. Read our article on the formation of a company to find more about the company formation procedure.
- Transfer of assets and liabilities: All the assets and liabilities of a sole trader are in his/her own name. When the conversion into the company happens, all the assets and liabilities of the existing business need to be transferred in the name of the company. There may be tax implications of such transfer, therefore it’s important to consult an accountant to understand these. Feel free to connect to us at 020 3960 5080 and get advice from our team of experts.
- Opening a separate bank account: There isn’t any statutory requirement for a limited company to have a separate bank account. But it is strongly recommended to open a business bank account in the company’s name, as the company is a separate legal entity, whose existence is apart from its owner. So instead of using a personal bank account for carrying out the company’s financial transactions, it is recommended to operate through the company’s bank account.
- Company to register as an employer: After switching from sole trader to limited company, the company will be paying salaries to its employees, hence the company needs to be registered as an employer with HMRC. It is essential to have its PAYE reference number and to run payroll.
- VAT registration: Information like changes in business contact details, bank details, VAT return dates and transfer of business from sole trader to a limited company need to be informed to HMRC within 30 days through a posting VAT484 form or online via your VAT account.
- CIS contractor: If the sole trader was a CIS contractor, then the change in the legal structure of business needs to be informed to HMRC over a call at 0300 200 3210 or via a letter addressed to PT Operations North East England, HM Revenue and Customs, BX9 1BX, United Kingdom.
Congratulations, you`ve managed to switch your business from sole trader to a limited company by following the steps above. However, this new form of business might require you to pay a little extra attention in its early stage.
So last but not the least, we would recommend engaging with an accountant who could help you in the smooth transition from sole trader to the company. A competent individual taking the onus of this transition process could help you get around any potential mistakes that you might otherwise commit. Not only this, but the accounting and taxation of the company also differ slightly from that of a sole trader, hence an accountant could help you manage your accounts and tax bills well especially, in the early stage.
