When you started your business, you’ll likely have registered as a sole trader. But if you’ve been trading for some time now, you might be thinking about setting up a Limited Company.
Incorporating has significant implications, but if it’s the right move for your business then you’ll reap the rewards. It doesn’t have to be difficult if you know what to expect – so here’s what you should do if you’re thinking about becoming a Limited Company:
Summary
Prepare
- Understand the advantages
- Make sure it’s the right move for your business
Register
- Choose a name and address
- Register with Companies House
- Notify HMRC
Transition
- Transfer contracts
- Transfer assets
Comply
- Manage compliance and filings
- Review insurance needs
- Understand your obligations
Preparation
Understand the advantages
Limited Liability
If your business fails or is sued, you’re only liable for the face value of your share in the business – beyond that, your personal assets are protected.
Top tip: be aware that if you sign a personal guarantee in relation to a company debt, like a loan, you would be personally liable for the debt even if it’s in the company name.
Lower Tax Rates
As a sole trader, you’ll pay income tax on all your earnings, but if you incorporate as a Limited Company you’ll only pay Corporation Tax which can be lower if you’re a higher rate taxpayer.
Access to Capital
In a Limited Company, shares can be sold which can raise capital through investment, helping the business to scale.
Brand Identity
When you’re a sole trader, your business is tied to you as the owner; by setting up a Limited Company you can separate yourself from the brand, allowing it to establish its own reputation and a professional, credible image.
Make sure it’s the right move for your business
Here are some signs that it might be time for you to incorporate as a Limited Company:
- Your business is financially stable
- When profits increase, operating as a Limited Company can be more tax-efficient
- Your business has growth potential
- Investors are more likely to invest in a Limited Company; and as your business grows and you hire employees or take on larger projects, incorporating can provide more structure and facilitate expansion
- You’re ready to take on the associated administrative responsibilities
- Incorporating comes with increased administrative responsibilities like filing annual accounts, submitting tax returns and maintaining records – you should be prepared to take this on yourself or ideally, work with an accountant who can take care of it for you
In short:
Consider incorporating if your profits are substantial and you want to grow and scale your business.
Remain a sole trader if your income is modest, you want minimal administration, and you prefer simplicity in your business structure.
Registration
Choose a name and address
This could be the most fun or the most daunting part of the process depending on your personality. Your Limited Company name will represent your brand and identity, so it should be relevant to your business, scalable, and suitable in the long-term.
It also needs to be unique and available – you can use the Companies House online name checker to verify this.
As well as registering a name, you’ll have to register an office address that you can receive mail at. If you don’t have physical premises, you can use your personal address. Alternatively, if you prefer privacy, you can use the Benson Wood office address for a small fee.
Register with Companies House
You can register your company online via the Companies House website.
You’ll need to appoint at least one Director, which can be you, and at least one Shareholder, which can be a director. Therefore, you can incorporate as a Limited Company even if you are the only employee of your business, as you can register as the sole director and the sole shareholder.
Top tip: consider appointing your spouse or partner as a second Director or as Company Secretary in case you become incapacitated.
As part of the process, two pieces of documentation will be produced:
- Memorandum of association – this is a signed statement by all the shareholders, agreeing to register a Limited Company
- Articles of association – these are written rules about running the company, agreed upon by the directors and shareholders
Consider seeking legal advice on these, especially if your business is to have more than one Shareholder and Director.
Find out more on the Government website.
The company will usually be registered within 24 hours of your application’s receipt. Then, a registered number will be issued to you by Companies House.
Notify HMRC
Make sure company is registered for Corporation Tax – this will be done automatically when you register as a company online. HMRC will then send you a ten-digit UTR number.
You’ll also need to register for Pay As You Earn (PAYE) if you are paying any employees or are paying yourself or other directors a salary.
Finally, you’ll need to register for Self Assessment if you haven’t already done so.
Transition
Transfer contracts
You should notify clients, suppliers and any other contractual partners about the change to your business structure. You’ll need to assign existing contracts to the new company, as well as updating invoices and other documents with the new company name and registration details.
You must open a business bank account in the Limited Company’s name – this is essential for keeping our personal and business finances separate. You should also notify your bank and any lenders about the change, and update your direct debits, standing orders, and other financial arrangements.
Top tip: online banks such as Starling, Tide and Monzo operate a fast-track opening service, meaning your new company bank account could be set up within hours.
Transfer assets
Any assets, such as equipment or vehicles, that you used as a sole trader can also be transferred to the new company. This may involve selling them to the company at market value based on the age and condition on the day of transfer rather than the price you paid for them. Make sure you seek professional advice – contact us to find out how we can help you with this.
Compliance
Manage compliance and filings
As a Limited Company, you’ll have greater accounting responsibilities than previously. You’ll be required to file annual accounts and confirmation statements with Companies House, as well as filing Corporation Tax returns with HMRC detailing your profits and tax liabilities. This is on top of payroll and VAT. If it seems like too much for you, it’s wise to work with an accountant – we can take care of your accounting needs with our full finance service, or simply offer you assistance as and when you need it with a bespoke service.
Review insurance needs
You should budget for Limited Company insurance. There’s only one policy you’re legally required to have as a ltd company:
- Employers’ liability insurance – this protects against legal action from injured employees
However, you might want to consider further policies that will help protect your Limited Company legally, such as:
- Public liability insurance – this protects against injury or damages
- Professional indemnity insurance – this protects against legal action following bad advice to other businesses
- Contents and portable equipment insurance – this protects contents you keep on site and equipment you use on the go against loss or damage
Understand your obligations
Finally, when you make the switch from being a business owner to a company director you’ll take on some new duties and responsibilities. You can familiarise yourself with these in the Companies Act 2006.
Incorporating as a Limited Company can bring many benefits, but it also comes with increased responsibilities. Seeking professional accounting and business advisory services can ensure a smooth transition and continued compliance – get in touch with us to find out how we can help you take the next step.
