How to convert from a sole trader to a limited company?

It’s a relatively simple process to convert your business from a sole trader to a limited company. Just follow these simple legal steps……..

Steps to convert from a sole trader to a limited company:

1. Establish a new limited company** (in this example called “NewCo”), or establish an LLP if preferred to convert to an LLP.

2. Hold a board meeting of NewCo and pass a resolution of the directors of NewCo to convert assets from the sole trader business into the new limited company (document needed: brief set of board minutes).

3. Brief sale agreement to transfer the assets from the sole trader business to the limited company. It will almost always be the same person signing the sale agreement as the sole trader and also as the director/shareholder of the limited company. The reason for this sale agreement is to create a paper trail to show evidence to HMRC that there was a genuine sale of assets from the sole trader business to the new limited company (DOWNLOAD>>> Sale agreement (sole trader to limited company)).

4. Set up bank account for NewCo.

5. Transfer assets (e.g. cash? equipment? employees?) from the sole trader business to NewCo.

6. Cease any trading activity of the sole trader business.

**The quickest and cheapest way to do this to use an online formation agent – just Google “company formation agents”. The most basic limited company package is usually £15 or less. You don’t need to upgrade to any of the packages or buy any of the add-ons. I usually use The Formations Company.

Is it easier to set up my limited company directly with Companies House? Why do I need to use a company formations agent?

You can go directly to Companies House although in my experience it is more hassle and takes longer. It costs £12 online and can be paid by debit or with credit card or PayPal account. Your company is usually registered within 24 hours. A company formations agent is even quicker than that. When you register your company directly at Companies House, you’ll need to create a Government Gateway user ID and password for your company (you cannot use your personal Government Gateway ID). A company formations agent automate a lot of the process for you.

What are the advantages if I convert from a sole trader to a limited company?

1. a limited company has ‘limited liability’ so your personal assets are not at risk – you cannot be sued personally for work done by your limited company;

2. a limited company pays different tax rates (corporation tax) to a sole trader (income tax) – so there could be tax advantages to trading via a limited company;

3. being a limited company rather than being a sole trader makes you look more ‘professional’.