Setting up a limited company should always be a consideration for all businesses, no matter what industry you are in.
Moving from a sole trader to a limited company may mean a lot more paperwork, and there is a much greater compliance burden. However, forming a limited company usually reduces the amount of tax you need to pay and can help make your business more attractive to potential clients.
Although it is not a legal requirement, using a qualified accountant to help you make the transition can ensure your new company is set up and registered correctly.
Here are some of the main steps required to set up as a limited company:
Step one: Register your company name
As a sole trader, you may have already been operating under a company name. However, this doesn’t have to be officially registered. As a limited company, you need to officially register your name with Companies House.
You can register your company directly, or you can enlist the help of an experienced accountant.
You will also need to choose a Standard Industrial Classification (SIC) code. This code will help identify and categorise your new limited company.
As part of this registration, you will need to detail all company directors and shareholders.
Step two: Company bank account
It is highly advisable to separate your business finances from your personal ones as your accounting requirements will be more complicated as a limited company.
As a limited company, you will be taxed differently compared to a sole trader. Not only will you pay tax on your profits, but you may also have to pay tax based on the money you take from the company in salary and dividends.
A separate company bank account will make this much easier to identify.
Step three: Update HMRC
You’ll need to inform HMRC that you are no longer operating as a sole trader so that they can update your tax and National Insurance records.
You’ll need to report the cessation of your self-employed business on your self-assessment tax return. You will however probably need to continue to file personal tax returns to report your salary and dividends, in addition to any other income you have.
Working with a qualified accountant can help ensure all the necessary returns are completed correctly, you’ll only pay the tax you need to and avoid potential penalties.
Step four: Register for company tax
As a sole trader, you’ll be paying tax and National Insurance based on your income declared through your self-assessment tax returns. As a limited company, you’ll need to pay Corporation Tax.
You will need to register for Corporation Tax within the first three months of trading with HMRC.
If your taxable turnover is above the VAT registration threshold (£85,000 for the 2019/2020 tax year), you will also need to register for VAT. You can also register to pay VAT voluntarily too, even if your turnover isn’t over the VAT threshold or more.
It is important to note that the decision as to whether to register for VAT is mutually exclusive to that of trading through a limited company.
Step five: Notify stakeholders and customers
To avoid any potential problems with invoicing, contracts and other paperwork, it’s best to let existing customers and stakeholders know of your change in business status.
Start your move to a limited company today
Working with an accountant is the best way to ensure your new limited company is set up in the best way.
At Cutter & Co we’ve been helping the self-employed successfully transition into limited companies for over 30 years.
The tax benefits of doing so will be unique to each business, so please contact us to find out more.
We aim to ensure that you notice as little of the burdens of becoming a limited company as possible while making sure you receive all the benefits.
If you’re still unsure if you need an accountant for your business, feel free to call us on 0121 550 8525. We’ll be happy to talk you through some options based on your individual circumstances. Alternatively, please send us a message using the form on our contact us page.