What does it mean to incorporate a sole trade?
There are major differences between running a business as a sole trade and running a business as a limited company. You can explore the differences between the two by looking at our guide Sole Trade or Limited Company.
If you have already started a business as a sole trader, but are now want the business to be a limited company, then you will want to understand what is involved in incorporating your sole trade into a limited company.
In this area of our website, we cover some of the aspects to converting your sole trade into a Limited company.
Registering a Limited company
To incorporate a sole trade you will need to set up a limited company. A limited company needs to be officially registered with Companies House. You can see further information on this on our page about Setting up a Limited Company.
Inform HMRC that you have decided to stop being a sole trader
You will need to inform HMRC that you will no longer be operating as a sole trader. This can be achieved through an online form and you will be required to provide the following information:
The date you stopped being self employed
Your UTR (unique taxpayers reference number)
Date of Birth
Type of trade
You will need to send a final tax Self-Assessment Tax Return (SATR) which will include your sole trade income up until the end of your sole trade. This return may also need to include the following items:
Any allowable expenses or costs involved in transferring your business structure
Any capital allowances on any of the sole trade assets transferred to your limited company
Capital Gains Tax on any assets transferred into the new company
Transferring your sole trade business to the Limited Company
Depending on the type of sole trade business that you have you may need to transfer your sole trade assets into the business. This could include things such as stock, machinery, equipment and property.
Your new company, as it will not yet have traded, is unlikely to have sufficient funds to pay money for the sole trade assets. The normal way this is dealt with is by creating a Directors Loan account and the company can then pay the director for these assets over a period of time.
You should be aware that transferring some assets can create a Capital Gains Tax liability based on the market value of the assets.
The Capital Gains Tax liability if there is one can often be reduced or even deferred by claiming available tax reliefs, including Incorporation Relief.
Set up a company bank account
As a separate legal entity a limited company should have its own bank account. This will enable you to keep your business finances separate to your personal finances. It also makes the bookkeeping and accounting easier.
There are many banks to choose from including a number of new ones. Bank charges can apply for business bank accounts and so it is worth taking time to compare the costs and benefits of the various bank account option and work out which is best for you.
Notify all the relevant stakeholders of the change of structure
You will need to let all of the parties connected with your business know that you are changing your business structure from a sole trader to a limited company. The key stakeholders that you will need to inform include:
Employees and contractors
Customers and clients
Banks and other finance providers
Register your Limited Company for relevant taxes
You will need to notify HMRC within 3 months of starting to trade in your new company that you are trading. You will be sent a form by HMRC when you form your company that allows you to do this. Once registered as trading HMRC will know to expect accounts and a corporation tax return on an annual basis.
If your company is expecting to turnover more than £85,000 a year you will probably need to register for VAT and in some situations it may benefit you to register voluntarily for VAT if your turnover is less than £85,000. For further information please see our Tax Advice area.
If your sole trade was already registered for VAT then the registration can be transferred to the limited Company. You will need to inform HMRC within 30 days by posting a VAT 484 for or online via your VAT account.
If you have employees then the company will need to be registered as an employer with HMRC and if you will be operating as a CIS contactor or subcontractor then again this will need to be registered with HMRC.
If you are unsure about how to transfer your sole trade to a limited company it is worth seeking specialist advice from an accountant.
At Sherwin Currid we have many years helping clients decide whether transferring a sole trade to a limited company is suitable for them and then helping them with the process and also providing ongoing support for the new limited company.
Please get in touch if you would like to discuss this area with us further, we would be delighted to hear from you.