The Full Guide To Changing From A Sole Trader To A Limited Company In 5 Steps

Your business is your number one priority, and it’s important that every part of it is set up in the best way to benefit you. 

But businesses aren’t static entities. They grow and change over time as you do – which means that the way you initially set up your company might not be working for you right now. 

This is a common problem that many sole traders face. Being a sole trader is great, but there comes a point that being a limited company instead might bring you bigger benefits and offers. 

The good news is that it is a relatively easy change to make, which we’ll reveal in this complete guide to changing from a sole trader to a limited company. 

First, make sure that you’re ready to change

Becoming a limited company provides more benefits and security than being a sole trader, such as: 

• Limited liability. A limited company is its own legal entity. This offers a level of security, as in the event of anything going wrong, the company would be liable for its debts – not you. You don’t have to worry about your own personal assets being offered up to cover any worst-case scenarios with your business. 
• Increased tax efficiency. Tax rates for limited companies are often better and more favourable than personal tax rates that a sole trader is responsible for, meaning you’ll be paying less tax. In addition, limited companies can claim more allowable expenses, further reducing your tax bill. 
• A more professional image. A limited company gives off a more professional and established aura over a sole trader. This is one of the more superficial benefits, but it can have a big impact on your clientele. 
• Increased financial backing. It’s easier to secure business loans and investments for your company as a limited company. In addition, you can also sell and assign shares in your company, offering investors a slice of the cake.

In addition, limited companies can be sold. So, if you’re thinking of hanging up the boots and calling it a day, giving up ownership to a family member (or just thinking ahead!), becoming a limited company can be a good exit strategy for your business.

You can change from a sole trader to a limited company at any time. However, you can’t easily reverse that change. So make sure that you’ve carefully thought about the decision before you commit to the change. 

With that little warning out of the way, let’s get down to the step-by-step process.

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Step 1: Find a company name 

The first step to becoming a limited company is to ensure you have a name in place. If you were already trading under a business name, it might be as simple as keeping the name that you’re currently using. 

However, there are a few caveats that you need to be aware of here. The main requirements are that your chosen company name is not already in use or too similar to an existing company name, and it should not contain any sensitive or offensive words. 

If your business name is already taken, you will need to find a new name. We’ve got advice on how to come up with a catchy business name here. 

Even if your current name is available – changing to a more professional-sounding name if you’re currently running your sole tradership under your real name could help your business reputation.

Approaching customers as Paul Pipes Plumbing is great at promoting the small, friendly handyman sense as a sole trader. But if you’re trying to get a reputation as a bigger, more professional company, you might consider changing to Pipes Plumbing Ltd.

Step 2: Appoint directors & allocate shares

All limited companies must have at least one director and one shareholder. You can list yourself as the director and sole shareholder if it’s just you.

But if you want to bring others on board, then this is the stage to decide what role they will have in your business, and the percentage of shares (if any!) they will own. 

Need more information about shares? Discover more in our guide to assigning shares in a limited company.

Step 3: Prepare the Memorandum and Articles of Association

These documents sound very legal and intimidating, but they’re not as bad as they seem. 

The Memorandum of Association is a one-page document that outlines who the initial shareholders will be. It also confirms their intention to take shares in the company and your limited company’s name. 

The articles of association is a standard document that every limited company is required to have – and is a bit like a rulebook.

Essentially, it’s an agreement that binds all members of a company to follow the correct procedures as set out in the Companies Act.

If you’re unsure of what these should look like, rest assured there are plenty of available templates that can be used for the memorandum and articles of association online.

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Step 4: Submit your application to Companies House 

With these documents done, it’s time to fill out and submit all the paperwork with Companies House and pay the application charge. 

When filling out the application, you will need the confirmed details of: 

• Your company name 
• Your registered office address 
• The value of, and number of, shares issued. 
• Personal details of all directors and shareholders

This form is easily accessible on the Companies House website – or you have a registered agent to complete the entire process for you. 

Step 5: Inform HMRC 

As soon as it’s all official, you need to make sure that you contact HMRC to inform them of your new company structure. You also need to de-register as self-employed and ensure that your class 2 National Insurance payments are stopped. 

As a limited company, you will now receive a wage through a PAYE system, so your tax will be calculated and taken directly from your wage. Don’t worry though – there are other ways that you can use to extract profit from your limited company (that are more tax efficient than being a sole trader!). 

If you have an accountant, you should inform them of the changes and ensure you’re now submitting the correct paperwork and returns as a limited company.

Take note of your responsibilities as a limited company 

After you’ve changed from a sole trader to a limited company, you must take note of the main differences between the two company formation types  – and ensure that you’re adhering to your new responsibilities. 

As a limited company, you’ll be expected to: 

• Register for Corporation Tax with the HMRC. If you have employees, you’ll also need to register for PAYE and tell the HMCR that you are an employer. 
• File annual confirmation statements to the Companies House. This is used to confirm and update your company data every 12 months. 
• Submit annual accounts at the end of every financial year, providing a full overview of your trading activity and finances.
• Submit your company tax return every 12 months to the HMCR. 
• Pay your corporation tax, which applies to all taxable income and must be paid at the end of every financial year. 

If you don’t already have an accountant, we’d strongly recommend that you get in touch with one to help make sure that you submit and adhere to all of these responsibilities on time and accurately. 

Failure to do so could result in hefty fines and penalties, which no one needs to deal with.

The easiest way to change into a limited company is by using a formation agent 

Turning from a sole trader to a limited company isn’t the most complicated process in the world. But… there are a lot of forms and double-checking to make sure that everything you fill out is correct and accurate.

There’s nothing stopping you from doing this yourself, but for peace of mind and a complete changeover in just a few hours, we’d always recommend using a company formation agent. 

Company formation agents are specialists that set up and register companies on your behalf, saving you time, stress, effort, and paperwork.

They can also provide a number of extra services, including business addresses to save your privacy when working from home and give you a more official address to use for your business. Find the best company formation agent for your business here.

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Moving your business forward

Changing from a sole trader to a limited company is a big step and can mean a lot more growth for your company.

To make sure that the change goes as smoothly as possible, don’t forget to check out our reviews of the best company formation agents, accountancy software, and online accountants to make sure you always get the best. 

No matter what stage your business is at, at Business4Beginners we’re here to help with the latest news, tips, and ideas to keep your business on top.