Six steps: from sole trader to limited company


If you have operated your self-employed business as a sole trader for some time you might have decided that now is the right moment to become a limited company. There are many benefits to becoming a limited company such as tax efficiency and looking more professional – but it can sometimes take self-employed businesses a long time to take this step.


This is often because they do not realise how simple it is to create a limited company. In truth, there is very little difference in terms of what is expected from you, and given the huge variety of advantages, it really does make sense. To make it easier for you, we have created this six step guide to take you from being a sole trader to a fully fledged limited company.


Step one: register with Companies House


As a sole trader you may have operated under a business name, but you don’t need to have registered it anywhere to do so. If you want to create a limited company you will need to choose a number and then get it registered with Companies House.


Step two: set up a company bank account


The next step in this process is to set yourself up with a company bank account. It should be noted that it is not a legal requirement to do so, however, one of the most crucial things that you need to be able to do as the owner of a limited company is to differentiate your personal finances from your business finances.


Step three: work with small business accountants


One of the challenges of moving from being a sole trader to a limited company is that your accounting needs can become more complicated. It can be a good idea to work with professional accountants with a good understanding of managing the finances of an SME.


Small business accountants OS Accounting state that working with professionals experienced in working with start-ups and new limited companies can “take care of the day-to-day VAT, payroll and company secretarial tasks that take up valuable time”. This can free up a lot of time for you and other members of your staff to focus on more business-critical work.


Step four: inform HMRC


As a sole trader you will have been providing HMRC with tax returns in order to ensure you are in line with tax and National Insurance purposes. However, this changes when you set up a limited company. Instead, HMRC will expect you to complete tax returns as a company director; this includes Corporation Tax returns and VAT returns.


You will also need to provide your personal tax return as a shareholder in your business.


Step five: register your company for tax


Once your company setup you will need to ensure that it is properly registered for tax. This includes being registered for Corporation Tax, PAYE, and VAT if it is relevant to you. The most complicated of three is VAT which you are only legally required to be registered for if you turnover more than £85,000 per year.


However, you may wish to register for VAT voluntarily regardless of your turnover. This will mean that you will need to pay 20% VAT on taxable invoices, but it also means you can claim back VAT where possible.


Step six: start trading as a business!

Once you have sorted out all of the steps above, you are ready to start trading as a limited company. Remember to ensure that your old clients and supplier all know that they need to invoice you or pay you using your new business name.

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