How to Change from Sole Trader to Limited Company?
Many individuals working as a sole trader in the past shifted from sole trading business to a limited company but there is some reason attached to it. Sole traders form limited company due to the following reasons –
If you are changing from a sole trader to a limited company, there are certain steps which you need to keep in mind which are as follows –
Right Time to Form a Limited Company
Generally, people start their business as a sole trader rather than setting up a limited company because of the following reasons –
- Easy set up
- Lower administrative burden.
Every individual whose earnings are low prefer to be a sole trader unless you need other benefits like limited liability. Other than this, there are many other benefits which you can avail as a sole trader such as performing tax & accounting responsibilities which are relatively simple that even you can do it yourself.
If you realize that your earnings are going up & it becomes economical enough for you to shift towards limited company, you can easily convert your business from sole trading to a limited company - which not only gives you a benefit of limited liability but also save much of your money on tax. You must inform HMRC that you are not working as a sole trader anymore and shifting to a limited company. It must be done so that HMRC can easily make changes to your tax system.
Benefits of Setting up a Limited Company
There are numerous benefits which you can avail by changing from a sole trader to a limited company. It not only provides you benefit of limited liability but you can also enjoy great borrowing power, improved reputation as well as credibility. Few other benefits are mentioned below –
Setting up a separate bank account
The most important benefit of incorporating a limited company is that the owner of the company is not personally liable for losses or any claim made against him.
Eventually, it is not a legal requirement but you need to set up a separate bank account for business purposes in the name of your limited company. It is done so that you can differentiate between your personal as well as company earnings.
Processing of income differently
Income is differently processed in case of a limited company. Your personal income is paid to you in the form of salary whereas dividends are paid to you after the payment of corporation tax as you are a director and shareholder in the company. Therefore, you need to keep your personal & business affairs separately as your tax is calculated differently in both the cases.
Business expenses are treated differently
You can also enjoy the benefit of claiming tax relief on various business related expenses as a limited company which you cannot claim as a sole trader.
Read More: Self-Assessment: Expenses You Can Claim Back as an Employee
Who should be a director in Limited Company?
In case you are setting up a limited company for your own business, you will be a director. It’s not too difficult but there are certain things which you must be aware of as a director. You need to think again in case you are working as a business partner or you want your partner or spouse to be a director & a shareholder.
In such cases, it is difficult to take decisions with potentially costly implications if you get them wrong. Therefore, we recommend you to take some professional advice from our experts in order to reach at a solution.
Transfer of Assets from Sole Trader to Limited Company
Any asset bought by you as a sole trader can be transferred to your limited company at the time of incorporation. However, there might be tax implications of doing it. Therefore, it is recommended that you must take a professional advice from our experts.
Corporation Tax
As a sole trader, you need to pay tax on your income via self-assessment tax return. You need to file self-assessment tax return on the basis of your earnings i.e. income tax & national insurance up to 47% whereas in case of a limited company, the corporation tax for year 2019/20 is 19% which may reduce to 17% from 1St April 2020. Make sure that you need to pay personal tax on any salary or dividends taken by you from a limited company which you can reduce only by doing proper planning with the help of our expert’s advice.
IR35
IR35 is a tax legislation designed to battle tax avoidance by workers who are supplying their services to clients via an intermediary such as limited company. In such cases, if intermediary is not used, the individual will be treated as an employee. These workers are known as disguised employees by HMRC. As per HMRC, some businesses are using their limited companies for the main aim of paying less tax. Therefore, it is important to check that whether any contract you are involved in as a limited company subject to IR35 rules & regulations or not? If your contract doesn’t compliant with IR35 rules & regulations, you will be liable to pay HMRC fines & penalties.
Also Read – IR35 Off Payroll Working Rules
Any Questions? Request a callback from our Tax Experts.
