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Thinking of switching from Sole Trader to Limited Company?

As a sole trader, it’s important to think about how your business might change as it grows. What you need in two years’ time might be totally different from what you need today, and you may need to change the structure of your business accordingly.

Here, we look at the benefits of transitioning from a sole trader to a limited company.

When is the right time to switch to a limited company?

When people start freelancing or contracting, they often set themselves up as sole traders. Compared to setting up as a limited company, it’s a much simpler way to get started with less paperwork and admin.

But as earnings increase, a sole trader may start to think about forming a limited company, to save on tax or bring on additional directors and shareholders.

But as earnings increase, a sole trader may start to think about forming a limited company, to save on tax or bring on additional directors and shareholders.

Many solo business owners also choose to become a limited company because of the extra protection it gives them. For limited companies, the risk and liabilities are tied up with the business as an entity. However, a sole trader will be personally liable for any debts.

Making the transition

Although there is a bit of paperwork involved, making the change is pretty straightforward. The government website has a step-by step guide on how to register as a limited company, and here are a few things to consider.

  • First, tell HMRC – Let the taxman know you’ll no longer be working as a sole trader, terminate your sole trader VAT registration, and re-register through the limited company.  
  • Get registered with Companies House – Here’s a guide on how to do that.  
  • You’ll need a separate business bank account – This is a legal requirement as a limited company, and to set it up you’ll need your Companies House registration number.
  • There are several ways to pay yourself – As a limited company, you can’t legally dip into the business bank account when you need personal funds. There are a number of ways to pay yourself – from salaries and dividends to director’s loans. This Rapid Formations blog post has more information on each option.
  • Business expenses will be processed differently – Any expenses you want to claim for which haven’t been run through PAYE will need to be recorded on a P11D form.
  • Your company can own your assets – Any machinery, computers or equipment you use in your work can be transferred to the company’s ownership.
  • Taxes are more complex – In addition to continuing to fill out your self-assessment, each year limited companies need to fill in a Corporation Tax return (CT600). You’ll also need to submit a quarterly VAT return.
  • IR35 legislation – Contractors deemed to be working inside IR35, even through a limited company, will need to make sure they pay the correct PAYE and National Insurance.
  • Think about getting an accountant – If you aren’t already using a bookkeeper, you may find one useful for the extra complexity that comes with limited company accounting.

Helping sole traders

Asto can help you manage your business admin when you’re on the move. Send invoices, record your expenses and get paid sooner.

Important Note:

Asto does not provide advice. You should not take anything in this content as any form of investment, tax, financial, legal or other advice. We have provided this content for your information only. You should not rely on it. Asto is not responsible for the accuracy or completeness of this information. You should seek independent advice as necessary.