Sole trader turns into a company

SO writes: I wish to convert from being a sole trader into the owner of a limited company as most of my blue-chip clients are uncomfortable with my current status. I run an environmental-services business that has been trading more than five years. I already have a dormant company of a different name. How can I convert without changing our name or Vat registration so customers are not affected? I do not want them to have to change our details in their records. What is the most tax-efficient way?

Answer

The most flexible way is to transfer the assets you need for the new business and the underlying goodwill. You need to pick a date when the sole tradership will cease and the limited company commence. Then you will need to produce accounts for the sole tradership until the date of cessation. The accounts will also show the balance sheet of the business. You must decide if there are any assets in the sole tradership that need to be transferred to the new limited company. We presume that as an environmental-services specialist you are supplying your expertise and time and that there are few assets. But there might be office equipment and computers, for example. These assets need to be transferred to the company. The debtors and creditors at the cessation date should stay with the old sole tradership. In other words, the old business will continue to collect its debts and pay its liabilities. The other asset the company will acquire is the goodwill of the underlying business. This will be transferred to the company in exchange for the issue of shares to you. The transfer of goodwill involves a potential capital- gains-tax charge, but any taxable gain can be offset against the costs of your shares. Your old Vat number and registration can be transferred to the limited company by completion of a new Vat application form for the company and a transfer of a going-concern form. This form needs to be signed by you as the sole trader and also by you as a director of the limited company. If you wish to trade under the same name, check there is not already a limited company with this name. Companies House can assist with this. You will then need to change the name of your dormant company or set up a new one with the required name. Both options are straightforward and your professional adviser can help. You need to set up a PAYE scheme for the company and close the old one. The money you withdraw from the company will need to be taxed under the PAYE system rather than the net drawings you would have taken from your sole tradership. As a shareholder you will also be able to get dividends.