Changing From Sole Trader to Limited Company

Changing From Sole Trader to Limited Company

Thinking of Changing From Sole Trader to Limited Company?

 

If you are running your business as a sole trader at some point you may start thinking of changing from Sole Trader to Limited Company.

This is quite common practice. Many businesses start with carrying on their business activities as sole traders. Then some of them change from sole trader to limited company.

This shift usually occurs when a business outgrows the sole trader business structure.

There may be certain reasons for you to think about changing your business structure. They may and may not be sufficient to actually start the process.

Thus, when deciding on such important things as changing the legal structure every business owner must lean on solid facts only and not his personal perceptions. Your ultimate purpose is to derive the greatest benefit for your business from every change you make.

 

Below are the most common reasons to change from Sole Trader to Limited Company:

 

  • Limited Company Formation Process is quick and affordable. Usually you get your new company up and running in 3 hours only.
  • Limited Company structure can help you to save tax.
  • Limited Company is a separate legal entity. It limits the liability of shareholders and directors. This means that your liability as a shareholder for any debts incurred by the company is limited to your shares in that company. Your personal assets cannot be seized to pay company debts.
  • Being a company positively impacts your image in the eyes of your customers, suppliers, partners and basically everyone else. People tend to have more faith in a business if it is a registered company.
  • Legal and financial mechanisms are easily accessible for Limited Companies to get investment and raise capital.
  • It is far easier to expand your business being a company rather than being a sole trader.
  • Your business name will be automatically registered together with your company.

 

Important things to keep in mind:

 

  • You and your limited company are not the same thing/person from a legal perspective.
  • You’ll need to open a new bank account for your limited company.
  • Limited company means more paperwork (but that shouldn’t be a problem as long as you are going big, right?).
  • Company funds are not considered to be your own funds unless they’ve been paid to you in the form of dividends.
  • If you will appoint yourself as a company director you will have certain legal duties to fulfil. For example, you will have to manage your company’s resources and finances.
  • Limited company records (e.g. registered address, directors, etc.) are in the public domain and available for everyone to see. This means less privacy for you.

Obviously, there are some pros and cons of changing from Sole Trader to Limited Company. The good news is that they are pretty straightforward.

In essence, the most important differences are: limited liability (this is actually the nature of Limited Company – the reason why this legal structure actually exists. With a limited company you have a limited liability protection) and access to investment/capital raising mechanisms.

If these reasons coincide with your situation, then you can start with the changing process.

 

Changing from Sole Trader to Limited Company – the step-by-step process:

 

Step 1: Form your limited company

Step 2: Notify HMRC that you have stopped self-employment as a sole trader. (You may use this link for that).

Step 3: If you are registered for VAT, you must notify HMRC within 30 days of the change. Otherwise, you will get a penalty. You can either cancel your VAT and then register a new one or transfer your current VAT registration. You can complete this step using this link or fill in and send this form to HMRC by ordinary post.

Step 4: In case you employ people, you will also need to notify HMRC about the change.

Step 5: Complete your final tax returns as a sole trader.

Step 6: Within 3 months of starting to trade through your company, you must register with HMRC for Corporation Tax. You can do this online.

Step 7: Inform all of your existing customers, suppliers, lenders, service providers and employees that you are going to start trading as a limited company.

Step 8: Update your website, terms and conditions and business stationery with your new details.

Step 9: Leverage the limited company advantages for the benefit of your business (after all you’ve changed from sole trader to a limited company for a good reason, right?).

 

Notes:

This article outlines the process of changing from Sole Trader to Limited Company in the UK. However, this is almost the same or very similar in other countries including Ireland and U.S.
** This article does not constitute a legal or accounting advice and is provided for general information purposes only. For a qualified advice please refer to the certified lawyer or accountant.

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What Names Are Acceptable for UK Limited Companies?

What Names Are Acceptable for UK Limited Companies?

Most names are acceptable to Companies House, but there are number of exceptions which fall into the following categories:

1. The proposed company name must be unique, meaning that there must be no other company incorporated under the same name.

2. Some words as “British”, “Group” or “International” must be substantiated by the means of providing evidence of other related companies or companies operating in at least two different countries. You will need to apply separately for the use of reserved words.

There are also sensitive words which could imply a connection with the UK government, an administration or specified public authority.

Words such as King or Queen are sensitive words, and you need request approval to use a sensitive word from the corresponding bodies/persons.

3. Names containing words likely to cause offence are not allowed.

For the company name search you can use our up to the minute system to check whether your chosen name is available for registration. Our company name search system is fully harmonized with Companies House, so you always get the most relevant result.

In case your chosen name is similar to an existing company name, that company could object within 12 months and you may be forced to change your company’s name.

Related: Changing From Sole Trader to Limited Company

Important Notice – Similar Names

Since October 2009 Companies House has started exercising stricter regulations in regards to similar names. Unfortunately, our current company name search engine can only specify if a name has or hasn’t been taken.

For example, ABC Ltd will be unavailable on our search as the name is already taken. ABC GB Ltd would appear to be available. However, this is not the case, GB falls into a category of words and expressions that Companies House feel do not separate the latter from the former. Therefore the company would be rejected. Other such words/expressions that fall into the same category are:

  • Company

  • Com

  • co.uk

  • International

  • Net

  • Org

  • Services

  • UK

  • United Kingdom

For the extensive list of words/expressions take a look here.

Please note that if you already owned ABC Ltd and wanted to form ABC GB Ltd this would be possible. You would just need to create a supporting document detailing your ownership or directorship of the original company.

Companies House will also reject names split up with punctuation marks. Once again, using ABC Ltd as our example company, all the below would also be rejected.

  • AB-C Ltd

  • AB and C Ltd (or &)

  • ABC! Ltd

  • @ABC Ltd

Companies House accepts the following punctuation, signs and symbols marks

  • 0, 1, 2, 3, 4, 5, 6, 7, 8 or 9

  • full stop (.), comma (,), colon (:), semi-colon (;) or hyphen (-)

Further reading:

UK Company Formation FAQ

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