Transitioning from a sole trader to a limited company can be a beneficial move for many entrepreneurs. Although the process may seem daunting, with the right guidance and support, it can be straightforward and advantageous. In this blog post, we will outline some considerations and essential steps involved in converting from a sole trader to a limited company, providing you with the necessary information to make the transition.

Firstly, let’s understand the distinction between Sole Trader vs. Limited Company.


Sole Trader: Embracing Full Ownership

A sole trader refers to an individual who manages and solely owns their business. Unlike partnerships or limited companies, where multiple individuals have vested interests, a sole trader oversees and manages every aspect of the business independently. This includes handling operational matters, legalities, marketing and financial decision-making.

One key characteristic of a sole trader is the complete control they have over their business. As the sole proprietor, they have the authority to make all financial decisions that impact their enterprise. However, it’s important to note that being a sole trader also entails personal responsibility for all business debts. Unlike companies, sole traders cannot shield themselves behind the veil of a separate legal entity, making them personally liable for any financial obligations incurred.  The advantages of financial autonomy need to be balanced by personal liability in the event of failure or insolvency.


Limited Company: Establishing Separate Identity

A limited company, on the other hand, is a distinct legal entity with its own identity. The company’s ownership is divided among shareholders, and each shareholder’s liability is limited to the extent of their interest in the company – typically to the value of shares owned.

One of the key advantages of a limited company is limited liability for its owners. In the unfortunate event of business failure or legal disputes, the personal assets of the shareholders remain protected and are not at risk, unless they have provided personal guarantees for the company’s debts. This separation between personal and business assets provides a level of protection and security for the owners.

Furthermore, opting to structure your business as a limited company offers significant advantages, particularly in terms of tax efficiency. By having control over the amount of salary and dividends you choose to pay yourself, you can optimise your tax strategy. Notably, the first £1,000 of dividends for the current tax year of 2023/24 remains tax-free (reducing to £500 for 2024/25), and for individuals within the basic tax band, dividends above this threshold are taxed at the prevailing rate of 7.5%. From the 2022-23 tax year, this rate was increased to 8.75%. Additionally, establishing a limited company allows you to leverage a lower tax rate on dividends by making your spouse or a family member a shareholder, provided they fall within the basic tax band. However, it’s important to be aware that transferring assets to the company may incur capital gains tax.

Understanding the differences between a sole trader and a limited company is crucial for entrepreneurs contemplating the structure of their business. Sole traders enjoy complete ownership and decision-making authority but bear full personal liability for business debts. In contrast, limited companies offer the benefits of limited liability, protecting personal assets, and establishing a separate legal identity but can compromise the running of the business through involving shared owners, a board and management team. Careful consideration of these factors can guide entrepreneurs in making informed decisions about the most suitable structure for their business endeavours.

Nevertheless, conducting business as a limited company introduces additional compliance obligations. These include the requirement to file statutory accounts and a confirmation statement to Companies House. Compliance is essential to ensure adherence to legal regulations and maintain transparency in your company’s financial affairs.

In summary, operating through a limited company offers the advantage of tax efficiency, empowering you to optimise your earnings through strategic salary and dividend decisions. By capitalising on tax-free dividends and potentially benefiting from lower tax rates for family members within the basic tax band, you can maximise your financial outcomes. However, it’s crucial to navigate the accompanying compliance obligations diligently, ensuring timely filing of statutory accounts and the confirmation statement.

If you operate as a sole trader or limited company, deciding to go from one type of business structure to another requires careful consideration and planning.


Steps to Convert from a Sole Trader to a Limited Company


Step 1: Register the Company

To begin the conversion process, you will need to register your limited company with Companies House.


Step 2: Transfer Assets

To ensure a seamless transition, you must transfer all assets required for your new limited company’s operations. These assets may include intellectual property, goodwill, land and buildings, inventory, machinery and equipment. The assets should be valued at their market value during the transfer for tax purposes.

If your new company does not have sufficient funds to purchase these assets outright, establishing a director’s loan account is a common solution. This allows the company to pay for the assets over time.

It’s important to note that transferring assets from a sole trader to a limited company may have tax implications. Fortunately, several tax reliefs are available to mitigate these implications, such as incorporation relief, gift or holdover relief, and Business Asset Disposal Relief. To take full advantage of these reliefs, it is advisable to consult an experienced accountant.


Step 3: Open a Business Bank Account

To keep your personal and business finances separate, it is crucial to open a dedicated business bank account. All limited companies registered with Companies House in the UK are required to have a business bank account. Notify all relevant parties, such as debtors and suppliers, about the new account details promptly.


Step 4: Inform Stakeholders

Whether you choose to register a new company name or continue using your previous business name, it is essential to inform your stakeholders about the change in your firm’s legal structure. Stakeholders will include customers, debtors, creditors, distributors and suppliers. Clear communication will help maintain transparency and avoid any potential confusion.


Step 5: Enrol for PAYE and Tax

Once your new limited company is established, the Companies House will notify HMRC. You will receive a letter at your company’s registered office address approximately two weeks after its formation.


Here’s what you need to do next:

  • Within three months of establishing trade under the new structure, register your company for corporation tax online. You will require your company’s Unique Taxpayer Reference (UTR) and Company Registration Number for this process.
  • If you anticipate a VAT-taxable turnover of more than £85,000 in a year, register your business for VAT.
  • Before making the first payment to yourself as a director or any employees, set up employer registration and PAYE (Pay As You Earn) to handle tax deductions. You can either use payroll software or hire a payroll provider for this task.


How Everett King can help

Changing from a sole trader to a limited company can be a significant step toward growth and success. While the process may seem complex, it becomes manageable with the right guidance and support. At Everett King, our team of experts specialise in company formation and tax matters. We can offer professional business advice and assistance to help you make a smooth transition and maximise the available tax reliefs. Contact us today and let us help you establish your new limited company