Registering Your Business as a Limited Company

Running a business as a sole trader may offer you the structure you want, but it doesn’t afford the protection that a limited company can give you.

What is a limited company?

A limited company creates a new corporate person - a legal concept which infers that a corporation may be recognized as having the same legal rights and responsibilities as a real person. Whilst the company can’t make executive decisions and is ultimately owned by shareholders who make the decisions, the company remains its own entity.

It's the directors who take care of the day-to-day running of a limited company (and they can be one and the same as the shareholders or entirely separate). Their duty is to act as the company’s management and carry out shareholders’ requests and action decisions.

Why should you convert from sole trader to a limited company?

When you trade as a sole trader, there’s little distinction between yourself and the company. As a result, you may be personally at risk from any liability. A limited company is a standalone corporate being, and all risk and liability is attached to the company, not the owners or directors. It can create peace of mind for the business owner.

Whilst there are times when a director can be personally liable for their actions, these are significantly lower and rarer than the liabilities of a sole trader.

Another benefit of changing from a sole trader to a limited company is that your personal tax is based on the salary and dividend you take from your own business.

Furthermore, deciding to take the plunge and adjust as a limited company could positively impact your reputation and brand. By incorporating your business, it might give you a more professional edge compared to other companies in the same market.

How do I go limited?

When converting to a limited company, you need to follow the same steps as you would if starting from scratch. Firstly, you need to ensure that the company name is compliant with the rules. Once you’ve decided on a suitable name, you’ll need to register the company with Companies House. To complete registration, you’ll need the following information:

• A registered address – This must be a physical location, but it can be a PO Box with a postcode. This address can be your accountant if they’re agreeable, or your home address.
• At least one director – This is simply yourself and/ or anyone else you’d like to help run the company on a day-to-day basis.
• At least one shareholder – Once again, this is yourself; as a shareholder, you’ll be the owner of the company.
• A Memorandum of Association – This is simply the agreement of the shareholders to incorporate the company. A guide to this can be found online.
• A Statement of Capital – This sets out details of the company’s shares and the rights attached. Usually, you’ll pay £1 and be issued with one share in the business. However, you can have as many or as few shareholders as you wish. But be warned that they’ll have control over the company.
• The Articles of Association – These are the rules about how the company will be run. They can be written for you or following the rules set out in the Companies Act 2006.

Registration can be completed by you or a third party for a fee of £15 if completed online, or £40 by post.

You need to inform HMRC of the new company’s existence within 3 months of incorporation, and register with them for corporation tax. HMRC will provide you with a unique tax paying reference and set up the company online so tax returns and annual accounts can be filed via the website.

You can inform HMRC via the online portal and more information about registering for corporation tax here.

Are you VAT-Registered?

If you’re VAT registered you must inform HMRC that you’re going limited within 30 days of the conversion. If you don’t inform them of the change, you’ll face a penalty.

There are two options available when converting: you can cancel your VAT and re-register, or you can request a transfer to the new company. You can complete the relevant paperwork online or in hard copy. The form can be found here or on the HMRC Portal for which you should already have log in details.

Do you have employees?

If yes, then HMRC must be made aware of the change in company status. If you’re moving the employees from the sole trader set-up to the limited company, there’ll be issues with PAYE, National Insurance and tax, which HMRC need to advise you on.

You’ll also need to create new employment contracts between the employees and the limited company. It’s best to seek legal advice when drafting these as they’ll have to contain various clauses and covenants. Get a solicitor to assist you. More information about employees and HMRC is available here.

One final step…

When converting from sole trader to a limited company, you’ll need to file one final self-assessment tax return. This is to be provided to HMRC – they’ll calculate the final tax instalment owed by you in this capacity.

You’ll also need to tell HMRC that you’re no longer self-employed. HMRC will undertake the necessary steps to alter your National Insurance status.