Converting a Sole Trader to a Limited Company

Quickbooks online limited company accountant

So you have decided to change from working as a sole trader to running the business as a limited company. You need to be aware of all the things which are different.

This articles will offer a simple explanation of what is involved in the transition to a limited company and what you need to think about.

When should I convert to a limited company?

Most people start their businesses as a sole trader to avoid the administrative burden when compared to setting up a limited company.

As earnings increase, sole traders start looking into forming a limited company for tax efficiency and more professional outlook for clients. You may also want to bring other people into the business as shareholders or directors.

Most people do benefit from forming a limited company, I would say the limit of being a sole trader is £30,000 profit per year. Anything above this is not worth it. Though I do believe you can benefit from a limited company sooner due to the limited liability.

What are the benefits of setting up a limited company

Limited liability

As the company is a separate legal entity, therefore your company debts are separate to your personal debts, so if your business fails you won’t lose your house.

Potential for greater profitability

As a sole trader, all of the profits made by your business are taken as income. On profits you pay income tax and National Insurance Contributions (NIC).

Through operating as a limited company, you’ll pay Corporation Tax (currently at 19%) on any profits, and can pay yourself through a combination of dividends and salary (usually set at the primary threshold for National Insurance). This will minimise your PAYE (tax you pay on your earnings throughout the year) and NIC outgoings. Any further payments you make to yourself will usually be taken as dividends. You have a £2000 tax free dividend allowance. The dividends will be taxed from 7.5% if you’re a basic rate payer.

You can claim more business expenses through your limited company than as a sole trader, which includes business-specific items such as stationery and business cards, mileage allowance, business trips, employee mobile phones and meals bought while working away. It’s important you speak to an accountant about which expenses are allowable, as HMRC have strict rules about what can be claimed.

Any money you claim in expenses will be deducted from your company’s profit and will therefore not be taxed.

Borrowing power

As a sole trader, you are the business, therefore you use your own credit rating to borrow capital used to grow your business. A limited company can establish its own credit rating, which can support borrowing to invest in the business.

Improved reputation/credibility

Business is all about confidence, trust and credibility.

Some customers, mostly larger companies and financial companies prefer to work exclusively with limited companies, while others will not work with sole traders at all. Having a limited company is like a badge of credibility for many businesses.

You need to set up a separate bank account

So we have already discussed how you are a separate legal entity to a limited company. Therefore your limited company needs its own bank account. 

Its actually not a legal requirement, but its best practice to set up a separate business account for your limited company. Do not use a personal bank account as there are some nasty tax consequences. It is generally just easier to keep track of your business when it has a separate business bank account.

Extracting income is different

Your personal income from your limited company will be paid to you in a combination of salary, which is paid before corporation tax, and dividends. Dividends are taken after paying corporation tax.

Who should be a director?

Usually if you’re setting up a limited company for your business then you’ll be a director. It’s not too difficult, please read up on companies house what they expect of directors. 

Sometimes people make people directors without thinking about the consequences, you need to be very sure who you make a director.

Transferring your assets to your limited company

Transferring your assets from sole trader to limited company can have tax implications depending on value and what it is. It is vital you speak with an accountant to see if there are any taxes arising.

What to tell HMRC

You need to notify HMRC that you aren’t working as a sole trader anymore as your tax payments will change.

The importance of getting the accounting right

What this all emphasises is the key role that your accountant plays in ensuring a limited company works best for you. Traditionally, one of the aspects of a limited company which dissuades people is the hassle that running one creates. However, with advances in technology, there’s no longer an excuse for the administration of your limited company to be overbearing.

Cloud accounting technology can be used to enable automated recurring invoice runs, automated bookkeeping, automatic VAT calculations (depending if you are VAT registered) and expense management.

It seems only natural that small business owners are able to maintain and check their small business accounts via the cloud. The leading accountants now use cloud technologies and Artificial Intelligence to look after their clients’ affairs. HMRC are also pushing the importance of technology through its Making Tax Digital (MTD) strategy for the online filing of tax information for businesses and individuals.

Without the right technology in place, running a limited company can be an unwelcome burden.

The ideal accountancy model to support your limited company

The best set up for accounting is to have a cloud accounting solution, Xero, Quickbooks, Freeagent and Sage business cloud, combined with an accountant committed to using technology to provide efficiencies and advice.
What you need to consider is the costs your accountant will charge you. These vary greatly and whilst some accountants promise low rates, it’s the hidden costs and added extras that can soon stack up. For example, if you phone your accountant for advice, will they charge you for contacting them? Are there any extra charges for essential tasks such as sending information to HMRC and Companies House? Do they charge you for basic personal and company tax advice?

Because of the wide range of pricing models in the industry, many small business owners are put off from forming their own limited company. Why form a limited company if there’s no guarantee of getting the level of service you need at a cost you can afford? It’s a real shame if people are missing out on the benefits of running their own limited company because they cannot find the right accountancy solution.However, owning a limited company isn’t just about saving money – it’s also an issue of financial security and the ability to separate the financial health of your business from your personal finances. It’s for these reasons that Crunch was formed in the first place: by combining online technology with real accountants on the end of a phone and email, accounting should be a breeze.

Get an accountant!

You may think we would say this, but! Getting an accountant is the best way to keep on top of your finances. They’ll remind you of important tax deadlines and payments due, show you ways of keeping your accounts in excellent shape, and advise you on allowable expenses and how to report them so you’re as tax efficient as possible. Advice is key, and accountants should act more like business partners rather than the straight numbers guy.
They can help you with things like estimating how much tax and NI you’ll need to pay, or quarterly for VAT. They’ll also help to ensure you’re not forgetting any payment on account, which catches many people out every year.
Make sure you get the right accountant today and book a free consultation with us.

We make starting a business or switching accountants easy

We make forming your company easy by explaining everything, making sure you don’t need to pay more tax than you need to. Switching to us couldn’t be easier – we manage the handover form your previous accountant so you don’t have to worry about lost information.

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