How to change from a sole trader to limited company

How to change from a sole trader to limited company

If you’re thinking about making the change from being a sole trader to a limited company, here’s what you need to know.

Difference between sole trader and limited company

A sole trader is a person who runs their own business, and can keep the profits from their business after you have paid tax on them. You are responsible for the finances of their businesses, including any losses. If you run your business as a sole trader your business is treated as the same entity as yourself. So, the level of risk involved is much higher as you are personally responsible for your business's liabilities.

Read more about sole traders

A limited company is its own entity, separate from its owners and with separate finances. The owners are only liable for debts up to their own investment value in the company. A limited company has shares and shareholders, makes a profit, and profits stay in the business after tax.

Read more about limited companies

When to become a limited company

Becoming a limited company can be more tax-efficient being a sole trader if you are making a big profit. As a limited company, your personal tax is based on your salary and dividends. So, if you earn above £30,000 it’s worth considering whether you could become a limited company instead.

There are also other benefits to becoming a limited company, such as not being personally liable for losses, the ability to borrow more money, and a better reputation with clients and customers. You can also claim tax relief on business expenses and protect your business name in ways you can’t as a sole trader.

How to change your business to a limited company

You need to tell HMRC if you decide to change your business to a limited company, as this is a change in legal structure.

If you transfer all your business assets to the limited company you may need to pay Capital Gains Tax. This will be based upon the market value of the assets, against the original cost.

However, if you transfer the assets in exchange for shares, you can be eligible for Incorporation Relief. Incorporation relief means you don’t need to pay Capital Gains Tax until you sell or dispose of your shares. You don’t need to apply for Incorporation Relief, you will get it automatically if you are a sole trader or a business partnership.

Read our step-by-step guide to setting up a limited company

Can you be self employed and have a limited company?

No, you can’t. When you become a director of a limited company you stop being self employed as the way you manage your money in a limited company is different. Any money earned belongs to the company, and you get paid through a salary and dividends.

Accounting software for limited companies

It’s really important to keep the correct financial records as the director of a limited company. Choosing an accounting software is the best way to have the records you need.

Bokio accounting software perfect for limited companies. With Bokio accounting software, you can do your bookkeeping, invoicing, and manage your finances in one place. Plus, you can submit automated Making Tax Digital VAT Returns to HMRC. Accounting is kept simple, so you have more time to spend managing your business.

Updated 13 October 2021