6 steps on changing from a sole trader to a limited company
Many businesses start as a sole trader and move to a limited company when they feel the time is right. Our step-by-step guide below shows you what you need to consider to make the change.
Step 1 – Understand the difference
Limited company
Shares. More people are responsible for the business.
Teamwork. More people care if your business succeeds.
More help. The government is better equipped to help your business.
Trust. Studies show that customers find companies more trustworthy.
Sole trader
Liability. The individual is the business.
Simplicity. The individual is in complete control.
Control. The individual keeps the profits.
Accounting. The individual doesn’t file accounts with Companies House.
Step 2 – Incorporate
The most obvious way to transfer your business from a sole trader to a limited company is to register as a private limited company (Ltd.) A limited company requires at least one director and a secretary, has shareholders with limited liability and cannot offer shares to the general public.
An account or lawyer can assist you, or you can register a company online. Make sure you choose a company name that isn’t already in use. Ideally, you’ll want to use the same name you’ve been using as a sole trader for the sake of brand continuity.
Step 3 – Set out your terms and conditions
As a new company, you’ll want to protect yourself from any customer uncertainty or misunderstanding. That means you will need to alter your business terms and conditions (T&Cs). A lawyer will be able to help you do this.
Step 4 – Inform your clients and suppliers
To minimise hassle for your accountant, you will need to inform your clients and suppliers of the change. You'll need to:
- Provide them with your new bank details
- Let them know your new T&Cs
- Update any prior contractual agreements
- Sign a new contract with your company as a counterparty
Step 5 – Company assets
This step can be the most complicated. When you form your company, you’ll need to decide what personal assets you would like to transfer to the company and establish its market value. It is important to discuss the transfer with your accountant or lawyer. Buying personal assets through your company will affect your company profits and Corporation Tax liability.
Step 6 – Update your insurance
Make sure you tell your insurer that you are now operating as a limited company – they may need to amend your policy.
It’s a common misconception that directors cannot be held liable for their actions. You may want to update your insurance to include directors and officers cover, which protects against allegations of mismanagement or wrongdoing by directors or officers. Without it, you may need to pay such legal defence costs out of your personal wealth.