Sole trader to limited company: how to make the switch and what to do after incorporation

If you are a sole trader thinking about moving to a limited company, the process is more straightforward than most people expect. You incorporate the company at Companies House, register it with HMRC for corporation tax and open a business bank account. The part people tend to overlook is what changes afterwards: you become a director with legal duties, and the company has its own tax and filing requirements. This article covers why you might make the switch, how to do it and what to put in place once your Ltd exists.

Sole trader to limited company: why switch?

Limited companies under UK law are recognised as separate legal persons. A company can, by itself, enter into contracts and take on loans and debt. It is a legal person in its own right, separate from you.

That separation is the main reason sole traders make the move. As a sole trader, there is no line between you and the business, so the business's debts are your debts. With a limited company, if it happens that the company becomes insolvent or goes bankrupt, then in theory the directors and shareholders should not be held personally liable for the debts of that company. Your personal assets sit on one side of the line and the company's liabilities sit on the other.

If you have not yet decided which structure is right for you, which business structure to choose compares the sole trader, partnership and limited company side by side.

How to set up a limited company

There are three things to do to make the transition.

• Step 1: incorporate the company at Companies House. You can do this easily online. If you apply online, it can take as little as 24 hours to receive your certificate of incorporation, which is the document confirming that your company now exists.
• Step 2: register with HMRC. Once the company is incorporated, you need to register it with HMRC so that it can pay corporation tax. A limited company pays corporation tax on its profits, which is different from the personal income tax you paid as a sole trader.
• Step 3: set up a business bank account. Open a bank account in the company's name and use it for all money coming in or going out of that specific business. The company is a separate person, so its money needs to be kept separate from yours.

These are not the only things you should be doing, but they are the three that get the company up and running.

After incorporation: tax, bank and director duties

Setting the company up is the easy part. What matters next is running it properly.

Your duties as a director

It is very likely that, if you incorporate the company, you will become its director. From that point on you will be expected to follow the directors' duties set out by UK law. Those duties are owed to the company and they apply from the moment you are appointed, whether or not you have read them.

As a sole trader you answered only to yourself. As a director you are acting on behalf of a separate legal person, and the law expects you to act in that company's interests. For this reason you might want a corporate lawyer to assist and advise you, at least while you get used to the new role. I have covered the duties themselves in what is a company director.

Get an accountant who understands limited companies

The second thing to do once you have set up your Ltd is to make sure you have accountants who understand corporation tax and all of the filing requirements of limited companies. Those requirements are different from, and more involved than, what you dealt with as a sole trader.

A good accountant will also help you get a better understanding of your financial standing, which matters more once the business is a separate entity with its own accounts. You might already have an accountant from your sole trader days; if so, check that they are comfortable with company work before you carry on with them.

Next steps

Incorporate the company at Companies House, register it with HMRC for corporation tax and open a business bank account in the company's name. Then treat the company as the separate person it is: learn your duties as a director, keep its money separate from your own and get an accountant who knows company filing requirements. If you are unsure about your obligations as a new director, speak to a corporate solicitor early rather than after something has gone wrong.