Incorporation – from Sole Trader to Limited Company

Thinking of changing from a sole trader to a Limited Company ? Why would you do that ?

There are a number of ways that businesses can trade – the most common legal structures for businesses are sole-traders, partnerships, Limited Liability Partnerships (LLPs) and Limited Companies. What are the benefits from operating through a Limited Company?

Here are just some of the benefits of incorporation:

Reductions in your tax bills.

Sole traders and partners can pay up to 45% income tax plus additional national insurance on any profits that the business makes (even when you don’t draw all the profit from your business). In contrast, corporation tax rates are much lower (typically 19%).

Limited Liability

Should a Company fail, the liability of the shareholder is limited to the amount unpaid on the shares, plus the unpaid amount on any personal guarantee agreements held with directors (most commonly on bank loans or overdrafts). Personal assets of directors will not be at risk if the business struggles (unless they have loaned money to the Company through directors’ loans).

Increased credibility

Finance companies, and other stakeholders are often more willing to deal with Limited Companies. Having the word “limited” after the business name, can provide an enhanced status to potential customers and can help with winning new contracts and tenders.

Share set up 

When the Company is set up, different categories of shares can be used which can enable different levels of payment to be allocated. This means advantage can be taken of the different personal tax circumstances of individual shareholders.

Selling the business

Forming a Limited Company requires that accounts are kept in order and that they are filed annually along with corporation tax returns. Whilst this may be a time consuming process, in most cases, it may make your business easier to sell in the future.

A director can borrow money

The Company can lend money to a Director with no need to pay high interest rates (shareholder consent is needed if the loan exceeds £10k). Note: There can be a corporation tax charge if the loan remains unpaid after the year-end, or a benefit in kind charge for the director and an NIC charge for the company.

Tax-free employee benefits

Incentives can be provided with the company obtaining tax relief thereon which isn’t possible for the self-employed employer.

If the business property is not owned by the Company

If the business property is owned personally by the director(s), the director can extract funds in the form of rent from the Company (with no PAYE or NIC issues).

As the Company is a separate legal entity

As the company is a separate legal entity from the owner, there is greater flexibility e.g. on death, the Company continues to exist as a legal entity.

Company pension contributions 

The Company has the ability to make pension contributions or pay into a health care scheme on behalf of employees and make other benefits available to employees. This will require some planning and may require the intervention of an Independent Financial Advisor (IFA), however it’s not a complicated process.

Safeguarding your privacy 

As part of the Company set up, you can safeguard your privacy as much as possible by making another office your registered office address if you wish and we can then take care of all paperwork.

Just talk to me about this service.