Incorporating your sole trader business
When you’re starting a business, the structure you choose has an impact on your tax liabilities. If you start a company on your own, the obvious choice is to begin as a sole trader, but as your business expands you may decide to incorporate. This will take some careful consideration, and a discussion with your accountant. If you think the time for a shift in your business structure is approaching, here are some tips to help you make the leap.
Sole trader vs limited company
Operating as a sole trader is simple, particularly if you provide services such as personal training, cleaning or plumbing. However, it does come with some restrictions: access to capital to expand your business may be limited, and it can sometimes be hard to secure larger clients who have reservations about working with unincorporated businesses.
As a limited company, your business may have greater access to investment opportunities. In addition, you relinquish personal responsibility for any debts and legal issues the company faces. However, you will need to cover setup costs and comply with certain requirements such as the filing of your annual accounts with Companies House.
Incorporating can bring tax efficiencies. As a sole trader you’ll pay Income Tax, while as a company you’ll pay Corporation Tax, which has lower rates for higher earnings. Your accountant will be able to calculate which structure is the most tax efficient for you in your present situation.
When should I incorporate my business?
Before jumping into incorporation, it’s important to undertake some tax planning. Sit down with your accountant to prepare forecasts for your projected turnover, expenses and profits. These should align with your business goals and will help you decide when to make the transition.
Incorporating your business at the start of the tax year may be beneficial, enabling you to create a clear line between the two phases of your company. That said, there will still be some crossover to navigate, and you’ll still need to prepare a Self Assessment, as well as a Corporation Tax return.
Steps for incorporating your business
When you switch to being a limited company, you’ll need to do the following:
- Choose a company name
- Appoint directors and shareholders
- Register with Companies House
- Notify HMRC and other relevant authorities
If you don’t already have a separate business bank account, you will need to create one. This will make bookkeeping and accounting much easier. Once incorporated, you may find you have additional responsibilities, including:
- Compliance requirements
- Managing relationship with shareholders and investors
- Managing the payroll of staff and auto enrolling them for pensions
- Navigating new financial and tax challenges
In terms of tax obligations, you may have to register for VAT, and your filing requirements will include company accounts, a company tax return, and a confirmation statement. The deadline for these will depend on your company’s year-end.
If you’re considering changing from a sole trader to a limited company, seek professional advice as soon as possible. This will put you in the best position to take the leap and grow your business sustainably.
