As your business changes, you may find that you need to consider some finer points. This could include changing from a sole trader to a limited company. But, when is the right time to transfer into a limited company, and what can it mean for your business?
When should you consider forming a limited company?
When you first think about setting up your own business, you will likely want to begin as a contractor, a freelancer or a sole trader. These businesses are much easier to set up and have a much lower level of required admin work, especially when considering what it takes to set up a limited company.
Whilst this may be the best approach right at the start, as things change and your business grows, you will start to think about setting up a limited company instead. This is especially true if your earnings have begun to increase.
It is not set in stone, but it is usually thought that you should change your business into a limited company once your profits reach the £30,000 mark.
Why set up a limited company?
Seeing as it takes some effort to set up a limited company, there is a good chance that you will want to really consider whether or not it is worth doing. It is important to remember that there are several benefits to setting up a limited company.
You won’t be personally responsible
When you set up a limited company, you will also need to set up a separate bank account for your business. This will take some effort to do, but the good news is that it means that much of the financial details and dealings of your business will be kept separate from you as a person. This means that should anything go wrong; you won’t be held accountable for the failings.
You can allow for dividends and expenses
Another key benefit of setting up as a limited company is that your income will be paid to you as a directors’ salary, rather than profits. This can be seen as an allowable business expense and also allow you to claim dividends too. Therefore, there is more scope to operate more tax efficiently.
Tax will work differently
When you are a sole trader, you will need to submit your Self Assessment to HMRC every year, including an Income Tax and self-employed National Insurance payment. When you are the director of a limited company, you do still need to file a tax return, but as well as this, you will need to ensure that you file a regular payroll too and possibly a self-assessment. Therefore, this may result in generally more admin work and more accounting fees.
As you can see, there are several things to think about and consider when transferring into a limited company. However, the important thing to keep in mind is that it will be worth it in the long run for you and your business.