How do you switch from sole trader to a limited company?
If you are ready to start a limited company and cease operations as a sole trader, the processes involved are not too complicated.
The list below should help give an overview of the things you’ll need to take into consideration.
Business bank account
When you set up a limited company, you’ll need a new business bank account. This is because your limited company finances are separate from your personal finances – unlike sole traders.
Updating HMRC
You will need to contact HMRC and let them know you will no longer be trading as a sole trader. This is because your taxes will change.
Assets
If you purchased assets for your sole trader business, you’ll want to transfer them to the ownership of your limited company.
Expenses
Expenses are processed differently when you’re a limited company director, and there are some awesome opportunities to investigate. Read our guide on limited company expenses to ensure you’re up to speed on what you can and cannot do as a director.
Setting up a limited company
Setting up a limited company is serious stuff. While the processes aren’t overly complicated, you need to be completely happy that a limited company is the right way forward for you.
Hiring an accountant or tax advisor
Accountants exist to help people with their finances. Therefore, we recommend you look into the possibility of hiring an accountant to help you with your limited company. There are hundreds of accountants around the UK that provide specialist services. These include traditional small-business accountants, contractor accountants, CIS limited company accountants, and more. There is also some exceptional pieces of accountancy software out there – designed exclusively for small businesses. If you would prefer to save money each month, have a look at the accountancy software on offer. But be warned, if you solely rely on software, you’ll have far more responsibly compared to hiring an accountant.
Insurance
Will you need insurance? We recommend you do your own research because everybody’s circumstances are different.
IR35
If you’re going to be the sole director of your limited company and you will be operating as a contractor, you’ll need to understand IR35 legislation. The government introduced IR35 to stop ‘disguised employees’ from taking advantage of tax breaks that they were not intended to access.
Letting your clients know
Don’t forget to let your clients know that you’re no longer going to be trading as a sole trader, and that you’re starting your own limited company.
If you’re unsure, please speak with a professional
If you’re unsure what your best option is for operating as a self-employed professional, there are plenty of people you can speak to and ask for advice. Do you know anyone who is a limited company director? It’s a great idea to talk with people with a company to get a better understanding of the processes involved. They may well be able to put your mind at ease.
A majority of accountants will offer free consultancy service so you can speak to a professional about the prospect of setting up a limited company. It’s a great idea to have a list of questions ready so that you can work through them one-by-one. After all, accountants are there to help, and they should provide you with impartial advice.
Further reading
What is a personal service company (PSC)?
Limited company expenses
Advantages of limited company contracting
Disadvantages of limited company contracting
Choosing a contractor accountant
Accountancy software for small businesses
Responsibilities of running a limited company
Status Determination Statements (SDC)
