Sole trader to a limited company – How to make the transition
You have started your own business, so firstly, bravo and welcome to the world of entrepreneurship. Choosing the right business structure for it is one of many decisions you would have juggled. This decision would have been part of a very long list of decisions such as digital marketing strategies and VAT registration (see What is the VAT threshold for small business?). You would also need to decide on pricing, whether you need MTD bridging software (see ‘What is MTD bridging software & do businesses need it?), and the list goes on and on!
Each of these decisions is complex in its own right, and you have hopefully reached out to professionals to guide you through each step, such as an accountant with regards to your VAT registration decision. One of the big decisions you had to tackle, very early on in the process, was the difficult dilemma of whether to choose to be a self-employed sole proprietor or to form a company and be an employee of this newly formed company.
Choosing between being a sole trader or a limited company
When 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 change
Any 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.
The 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.
This 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.
You can have a business name or trading name that is different from the company’s registered name but it cannot contain any ‘offensive’ words or expressions, nor can that name contain the words ‘ltd.’, ’limited’. ’plc.’ etc. So the company might be registered as Smokey Mountain Trading ltd, and you can trade as “Smoked”.
The company’s registered name is not left unseen in a dusty drawer as it is a legal requirement that it is clearly displayed at the company’s registered office. It must, in addition, be displayed at all the locations from where you operate the company. It does not have to be displayed at your home. The company’s registered name also needs to be included in all the company’s documents such as letterheads and invoices, as well as publicity, letters, website, etc.
Now 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
Statement of compliance
Memorandum of association – The Companies Act, 2006 requires one or more persons to subscribe their names to a memorandum of the association to state they want to form a company. They also need to state that they subscribe to at least one share each.
Application for registration of a new company – This application must state the following;
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.
Other documents – These are as follows:
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
Statement of compliance – This simply confirms that you have met all the requirements of the Companies Act, 2006 (with regards to company registration).
Registration and issue of a certificate of incorporation
If 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!
The 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.
A 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: