Choosing between being a sole trader or a limited companyWhen standing on the one side of the start-up bridge, it seems to make sense to carry out business as a sole trader. In the initial phase, it may be weeks before you have a client, there will be teething problems, and you may not even have fully completed your website by your chosen launch date. Turnover is low, risks are low, and the fuss of forming a company may seem wasteful of your precious entrepreneurial energy. Being the switched-on entrepreneur that you are, you find that your business has now gained traction, turnover is growing and the business may even have quickly reached an expansion need! In scenarios that sound similar to that, it would be prudent to plan towards switching from sole trader to a limited company. This is not a status decision; it is because you could be accessing a wide array of benefits when your business is registered as a limited company structure. You can access the risk protection from limited liability, name reservation, reduced tax rates, and many others. These are specifically only available to a registered, limited company entity. Now that you are more sure of your need to convert your business from a sole trader structure to a limited company structure, you should work through the decision with your accountant. If there are no warning bells from that meeting, then the following steps must be followed:
Inform HMRC of the changeAny change of business structure in any form must be notified to and processed by HMRC. You will therefore notify them of the desired change from a sole trader to a limited liability company. It is not one single step as you will also need to advise them of when “the person” (you) stops being self-employed. This is required as you are a legal entity with a different taxation status from an employee. The best way to convey this information to HMRC is via the Government Gateway account. There will be a requirement for you to execute the completion of self-assessment tax returns for the final year of self-employment. This would, of course, be up until the switch to another business structure. Again, it would be best to get your accountants input on the returns to ensure there are no mistakes.
Company FormationThe process of transferring a business from a sole trader to a limited company involves the need to set up the destination company, i.e. your limited company. You will need to jump through a few legal formality hoops to facilitate this, but your accountant can guide you through the following steps.
NamingThis is one of the first essentials – giving your company a name. This often starts off a fun, creative process but can become quite trying after discovering that your choices are already taken. Some companies are dedicated to providing an excellent, professional company naming process. The name is very important as it will be the sole character of your business, and it will need to work as a URL address and work overseas. These are some high-level tips:
- You cannot use the same name or a similar name to another company or trademark registered previously. Use online search engines and business registries to review your shortlist of names.
- It is expected that the name will end with ‘limited’ or ‘ltd.’.
- It must not be offensive nor form an offensive word when combined into a URL address and, if you want international clients, it should not translate into an offensive word overseas.
- It is imperative that it does not suggest, in any form or manner, that your business has a connection with government or local authorities unless there is explicit permission in a contract that you may use it. Click here to learn of ‘sensitive’ words or expressions that you may not include in the name and the use of them.
Document registrationNow you are at the stage of setting up the company with the Registrar of Companies. The following documents are required:
- Memorandum of association
- Application for registration of the company
- Other documents
- Statement of compliance
- The company’s proposed name that you are so carefully worked on.
- Confirm the company’s registered office as being located in England and Wales, or in Wales, in Scotland, or in Northern Ireland
- Most importantly, you must state the liability of the members of the company is to be limited. Discuss this with your accountant. If it is being limited, then declare whether this is by shares or by guarantee.
- Confirm whether, at this stage, the company is to be a private or a public company.
- If you have an agent helping you with this application, then their name and address must be stated.
- Statement of capital and initial holdings for a company limited by shares
- Statement of guarantee, for a company limited by guarantee
- Statement of the company’s proposed officers, i.e. director, secretary
- Statement of the intended registered office of the company
- A copy of the proposed articles of the company
Registration and issue of a certificate of incorporationIf the registrar is happy with the submitted documents will put your file into the registration process. When this is complete, you will be issued with a certificate of incorporation to the company. This is conclusive evidence that your submission has met all the requirements of registration. Congratulations, your company is now registered!
SIC CodeThe SIC code is a 5 digit standard industrial classification code. When a company registers at Companies House, it needs to give at least one SIC code that describes its business. There are over 600 SIC codes in the UK for use by government bodies and agencies, e.g. Companies House and the Office for National Statistics, to identify and categorise the principal business activities of companies. You can choose up to four SIC codes if need be.
DirectorA public company must have at least 2 directors. A private company can have one director, which has to be a natural person. The director is responsible for the administration tasks of the company. A director must be:
- Over 16 years of age
- Should not be disqualified to be a director
Company SecretaryAnother position required by a public limited company, and not by a private company, is the need for a company secretary. Anyone can be the secretary unless they are:
- The company’s auditor
- An ‘undischarged bankrupt’
UTR NumberCompanies House will inform HMRC about any registrations they process. You will get a letter from HMRC with your company’s Unique Taxpayer Reference. Registration for Corporation tax – You will have to sign up the company for corporation tax within 3 months from the date it starts trading. Other registrations – Registration for PAYE if you have employees and registration for VAT if the company’s annual turnover will be more than the VAT registration threshold. You can do a voluntary registration upfront or wait till you cross the threshold. See our article ‘Should I charge my clients VAT’.
Assets and liabilitiesWhen you convert from a sole trader to a limited company, this will affect any assets. All the assets and liabilities of the existing business, which would have been in your name up until now, need to be transferred to the company’s name. Be sure to strategise this with your accountant, as there will be tax implications of such a transfer. Bank account – You are not obliged by law to have a separate bank account for your new limited liability company, but it will be an accounting mess if you do not. Additionally, it will make it very difficult for A.I. accounting software to function properly. The debtors and creditors are also assets and liabilities of the company, so the correct tracking of these is essential. The simpler it is, the better for accurate record-keeping, asset management, and risk management. The company is a separate legal entity, and it exists separately, by law, apart from its owner. Keeping your personal account separate also ensures that there is no chance of ambiguity being created regarding liability.
Register the company as an employerYou are switching from sole trader to limited company because your company has grown, so there is no doubt you have employees. You would have previously registered yourself as an employee. The company now takes over this role as it will be paying salaries to its employees. You, therefore, need to register the company as an employer with HMRC. Through this process, you will obtain its PAYE reference number and will run payroll online with that number.
VAT registrationAny VAT information changes like a 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 you were a CIS contractor, then business restructuring needs to be phoned in to HMRC (PH: 0300 200 3210) or via a letter addressed to PT Operations North East England, HM Revenue and Customs, BX9 1BX, United Kingdom. You are almost there. We have referred to an accountant throughout this article and must reiterate, converting a business structure is definitely the time to engage the services of one! They will be an enormous help through the transition from sole trader to the company and will help you avoid any unwitting mistakes. More importantly, the accounting and taxation of your new company are different from that of a sole trader, so you will either have to do an emergency crash course or use an accountant for managing the finances strategically and getting your tax bills correct. You may find that you learn enough from them over a few months that you can fly solo again, but during this transition phase, it will save you from many sleepless nights and redos. Now, you can sit back, albeit briefly, with a sigh of relief because you have ticked all the boxes. You have switched your business from a sole trader to a limited company by following the steps above. Congratulations! To learn more business tips, visit our Business Development blog now!
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