Moving from a Sole trader to a Limited Company

The easiest way to open a business is to start off as a self-employed sole trader. As a sole trader, either on your own account you run your own business as a self-employed person. A sole trader needs to ensure they are registered with HMRC and must file a tax return annually.  This allows for a relatively easy set up in the early years of a business. A self-employed individual effectively treats both their business and personal tax affairs in one, with profits treated as income and taxed accordingly.

If you are self-employed and your business is growing, then you, or your accountant, should be thinking about changing your status to working through a limited company. A limited company is a completely separate legal entity and the question of whether this move would be worthwhile is dependent on a number of factors. For many self-employed sole traders a change of status to a limited company offers a number of potentially important benefits. Primarily, this can include tax savings and ultimately more cash in the business.  

Some of the most important benefits to moving from a Sole Trader to a limited a limited company are: 

  • Separation of business and personal matters. The limited company is a separate legal entity and the actions of the company are not legally attributable to the individual.
  • This means that any debts of the company must be met from the company business assets and not from your personal assets.  However, banks and other lenders may require the directors to provide personal guarantees.
  • Tax rates are usually lower for companies although your salary as a Director remains liable to Income Tax. This expense does reduce profits of the company.
  • There can be significant personal tax benefits to trading as a limited company with many options available as to how to extract money from a limited company including a ‘low salary – high dividend’ approach. A limited company can also re-invest profits far more efficiently than the self-employed.
  • The sale of the limited company can lead to other tax benefits. For example, when you sell qualifying shares in a trading company you will be able to claim Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) so that you only have to pay 10% CGT rather than the normal rate of 20% on the first £1,000,000 of capital gains.(please check current rates)
  • The ability to raise finance through a limited company can be more advantageous. Banks are more comfortable working with limited companies and there is a wider array of borrowing options. There are also more investment opportunities. This can make it easier to expand and grow your business.
  • Some businesses will only work with limited companies as there are more checks and balances. This can also enhance the branding of the business.
  • Capital Gains Tax incorporation relief. If you convert a sole trader business to a limited company then a capital gain will be deemed to arise. This could give rise to a chargeable gain based broadly on the difference between the market value of the assets and their original cost. In most cases, the incorporation of the business will be done in such a way so as to satisfy the conditions necessary to secure incorporation relief. The incorporation relief means that you won’t pay any CGT until you sell your shares in the business. Where the necessary conditions are met, incorporation relief is given automatically and there is no need to make a claim.

It must also be remembered that operating a limited company can be far more complex than working as a self-employed person. In order to set-up a limited company the company must be registered with Companies House and at least one director must be nominated.

HMRC will need to be notified of starting to trade through your company, and the limited company must register for Corporation Tax. You must also let HMRC know that you have stopped working as a Sole Trader

Want to discuss the benefits of trading as a Limited Company?

If you are a sole trader who would like to explore this option then please get in touch with us. We can arrange a no obligation call to review your existing circumstances. Call us now on 020 3411 6076.

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