How to go from sole trader to limited company contractor

How to go from sole trader to limited company contractor

09/22/2021 - 11:07

There are a number of advantages to operating through a limited company rather than as a sole trader. Working through a limited company is more tax-efficient. It also gives you limited liability, so you won’t be held personally responsible for business debts.

If you want to take your contracting business to the next level, you’ll need to follow a set process to switch from sole trader to limited company contractor.

Registering your company

First, you need to register as a limited company with Companies House. This is a straightforward process but one you must get right.

To register, you’ll need:

  • A unique company name
  • A registered address
  • Director details
  • Shareholder details

Tell HMRC that you’re no longer a sole trader

You must tell HMRC if you’ve stopped trading as a sole trader. This is a simple process similar to filing your self-assessment. You’ll also need to submit a final tax return to pay any tax that you owe from self-employment.

Transfer assets to the limited company

Any property, inventory, machinery, equipment or other business assets you own will need to be transferred to your limited company.

Because your business is unlikely to have money to pay for these assets yet, you will generally do this by creating a director’s loan account for the company to repay these assets over time.

Certain assets may be liable for Capital Gains Tax, which is calculated from the market value of the transferred assets.

Open a business bank account

Sole traders aren’t legally required to have a business bank account. However, because your limited company is a separate legal entity, it needs to have a separate account and you need to make sure you keep the finances separate at all times.

You should also make sure you contact your existing customers, suppliers and debtors to make sure they update their records.

Register for PAYE and tax

After you register your company with Companies House, HMRC should send you a letter explaining your legal obligations when it comes to reporting and tax. They will also send your company’s Unique Taxpayer Reference (UTR).

Within three months of starting your company, you will need to register your company for Corporation Tax.

If your annual turnover is expected to exceed £85,000, you’ll also need to register your limited company for VAT. You can also do this voluntarily to improve tax-efficiency or boost the standing of your company.

If you want to pay yourself a director’s salary, or if you want to pay any employees, you will need to register your business as an employer and set up PAYE. This can be done in house or through payroll provider.

For more information about setting up as a limited company contractor, speak to a member of the team. Call: 0800 121 6513.