Alternatively, you can change from a sole trader business to a limited company structure when your business is established and begins to grow.
Your company can be registered with just one person, or you can set up a company with multiple shareholders and directors – it is a very flexible business structure.
The three principal reasons to trade as a limited company are:
- Limited liability
- Tax efficiency
1. Limited Liability
The biggest benefit of running a business as a limited company is limited liability. If a company runs into financial difficulty, the personal finances and assets of the shareholders are protected beyond the value of their shares. So, if your company is unable to pay its creditors, you will only have to contribute the nominal value of the shares you hold – this could be as little as £1.
Limited liability is crucial if you plan to provide high value supply or services that could potentially lead to liability claims. If any such situation should arise, your personal finances and possessions are protected – this is not the case for sole traders.
2. Tax Efficiency
Limited companies offer greater flexibility and more opportunities when it comes to the taxation of profits and personal income – company profits are liable for Corporation Tax of 20% for the first £300,000, and 21% for profits above £1,500,000. As a comparison, sole traders are charged 20% Income Tax on profits up to £31,865; 40% between £31,868 – £150,000; and 45% on profits exceeding £150,000.
It is also easier for directors to keep their income below higher bands by taking a combination of a salary and dividends – this means less money goes to HMRC and more money is available to reinvest in the company or distribute to directors and shareholders. There is no such tax-saving strategy for sole traders.
Limited status can boost the perceived value of a business by creating a professional, corporate image.
Many industries and corporations are more likely to do business with limited companies, rather than sole traders, because they are considered more established, committed, and credible. Limited liability also gives certain industry professions a sense of security when choosing to invest or use the services of a new business.
There are greater accounting requirements and administration costs associated with running a limited company, all of which require more time and attention; however, the financial and professional gains often counter these perceived pitfalls.
When should I switch from sole trader to limited?
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