Going From A Sole Trader To A Limited Company

May 06, 2015


First off, why change from being a sole trader to a limited company?

Well, one important reason is liability. As a sole trader, if you attract a legal action, you are the one with the target on your back. The shysters will be coming after you. And that means your assets. Your home, car, and bank accounts are all in the frame. For this reason setting up another ‘body’ in law, literally ‘incorporating’, means there’s another entity about that can take the flack: ‘John Smith Services Ltd’ rather than John Smith himself.

You will also hear that there may be tax advantages. Depending on the government of the day, that may be so. Your company exists as a separate legal entity from you. It will pay tax on any profits it makes. Unlike your person, the tax liability starts at the first £1 of profit but lots of items can be charged as expenses towards it, as long as these items are paid for by the company rather than from your personal accounts.

Another reason to change to being a limited company is marketing. People are more impressed by ‘SomeTech Services Ltd’, than ‘John Smith t/a Sometech Services’. It sounds a bit more serious and image is everything in business. You may also hide behind the persona of the company. Staff can come and go without the good name of your enterprise being affected.

Then there’s the creation of wealth, almost out of thin air. A company can sell shares and be sold as a commodity itself. It has a financial value that you as a person do not. All you have to do is keep its records straight and turn a profit.

It’s worth speaking to your accountant about your tax status if you decide to move from being a sole trader to a limited company. He’ll know exactly what to do and what the current tax implications are.

A limited company will be required to file a corporation tax return with HMRC (Inland revenue) and annual accounts in the required format must be prepared and sent to Companies House. The accounts filed must comply with the statutory requirements. You will need to keep an eye on deadlines for submission of your company’s returns as there are penalties for late filing. These penalties, while seeming to be daunting, are simply to motivate director’s to keep their public record straight, in good time. People often won’t move until they are pushed.

Most companies are Private Limited companies. This means that their shares are not traded publicly and that shareholders have a limited liability in law. A Private Limited Company is “A type of company that offers limited liability to its shareholders but that places certain restrictions on its ownership. These restrictions are spelled out in the company’s articles of association or bylaws and are meant to prevent any hostile takeover attempt.

The major ownership restriction are: (1) shareholders cannot sell or transfer their shares without first offering them to the other shareholders for purchase, (2) shareholders cannot offer their shares or debentures to the general public via a stock exchange, (3) the number of shareholders cannot exceed a fixed figure (commonly 50).”

So how to set up a company?

The simplest way is to get someone else to do it for you, like Registered Address Ltd. A company can be set up surprisingly quickly, even in a matter of hours. It’s just a matter of the correct information being sent electronically to Companies House. This is the entity that regulates and keeps records of company names, directors, annual accounts and the like.

You will need at least one director (the business owner, usually). You will need to give your home address but a ‘service address’ can also be used. This is an address where legal documents can be sent to you. Use of such an address hides your home address from snoopers and marketers. A nominee director can also be appointed temporarily if you need to sort out who your directors are going to be and what their roles are or if your company is to remain dormant. Other items like shares and share capital are set at nominal figures and standard memoranda and articles of association are used.

One important item is your Registered Office. This is the address where your company can be served legal documents. Most people either use their accountant’s or use a mail forwarding address, like the one provided by Registered Address Ltd.

Britain makes it very easy and inexpensive to set up in business compared to most other First World countries. Once set up, you can then begin trading with your new company and let it be known that you are now no longer just a freelancer but a company director. Exciting!

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