So you’re running your business as a sole trader and wondering whether it’s time to switch to limited. The main benefit of incorporating as a limited company is that your liability is limited and you can pay less tax, but there is more paperwork and there are legal considerations so there is no need to switch for the sake of it.
As a sole trader you’ll currently be paying tax after your £12,570 (2021\22 tax year) personal allowance, and National Insurance Contributions (NICs) as you would if you were an employer and you can’t carry profits over to the next tax year. If you are running a business where there is no risk, you are testing the market, or your enterprise is a hobby then there’s really no need to switch.
However if your income is growing (even if you are a contractor or consultant), or you want to expand by taking a loan or some lease agreements, then a limited company is definitely worth considering. If you are branching out into new markets a limited company status may help with the sorts of clients you can secure, because some won’t deal with sole traders and like the security of dealing with a company.
If decide to go limited, you will become the employee of your company and profits will belong to the company as will any losses.
The setting up process is a bit longer than the sole trader route, as you need to notify Companies House and get a certificate of incorporation, but this can be done in as little as 48 hours. You will also need to determine if you want to be limited by shares or guarantee. Do get in touch with us or your accountant if you would like to do this.
The taxing process is also a little more complex, but you can pay yourself a salary with dividends which are free from National Insurance. Yes, there are statutory legal requirements, and as director you are responsible for providing prompt and accurate accounts each year, but should anything happen, such as you choose to stop being self-employed or someone chases you for an amount you aren’t able to pay, that will rest with the company and not with you personally.
There is no right or wrong business structure, just the one that suits your individual situation, and if your business needs are becoming more complex, it’s well worth thinking about.