If you’re a sole trader it can sometimes be difficult to manage your workload, especially if you’re continuing to grow and get more and more work. Eventually, you’re going to get to a stage where you’re going to consider making the transition to a limited company. However, it’s essential to know when exactly the right time is to make this transition and how to make the move correctly.
One big incentive for most sole traders to make the move towards turning themselves into a limited company was purely for tax benefits. As a sole trader if you’re making significant profits you’ll be more than aware that you can be taxed up to 40% on these profits. However, if you don’t necessarily need all of these profits this means that you’re essentially losing money. Whereas if you make the move towards becoming a limited company you can keep money within the business and withdraw only a certain amount of the profits being taxed at only 19%.
As a sole trader, you’re also going to want to ensure that you can say that all of the following statements are true to accurately establish whether you’re ready to make the move:-
- That you want to keep the company as a separate identity entirely from yourself as an individual. .
- With the upcoming investment, you’ll need to start looking into the share structure.
- You’re ready to start employing workers to help your business scale up.
- You want to protect yourself from the potential of unlimited losses through limited liability.
- Your profits are nearing the £20,000 mark.
- You are going to be acquiring new shareholders in the foreseeable future.
One of the above has proven more important than most of the others to sole traders who have made the transition to becoming a limited company, and that is the first bullet point. As a sole trader, the only identity you currently have is linked to yourself as an individual, which means you as an individual are legally liable for any losses/lawsuits. Whereas when you make the move to becoming a limited company, the newfound limited company itself becomes a separate legal entity essentially detaching you as a person from the full legal responsibility. If this is a big point to take into consideration then it seems like you might be ready to make the transition.
However, when it comes down to making the decision, there’s never any set right time to make the move. It all comes down to you as a sole trader and whether the benefits that are going to be offered by the change are worth the transition. For some sole traders, the tax incentives may be the sole deciding factors, for others, as we’ve mentioned, it might be the fact that the company is now the liable legal entity and not themselves.
It’s also seen that having a company provides a much more robust and professional impression to potential clients, customers and the public. Giving the impression your company is scaling up. And, believe it or not, you may not have come across such a client yet, but some potential clients will only work with limited companies and despite you having everything they need, purely due to you being a sole trader, they will continue their search until they find their match in the form of a limited company.
The move from being a sole trader to becoming a limited company also involves a considerable amount of paperwork and other administrative tasks which you should be prepared for. This shouldn’t put you off and rest assured it won’t complicate matters for you however it’s something you should be aware of so that you can proactively allocate some time out of your working day to get these administrative tasks completed. It’s also good to know that when you switch to becoming a limited company you’ll find that the costs associated with running a limited company are much higher compared to when you were a sole trader.
Also, as a limited company director, you can’t just take funds out of the company the way you were previously as you’ll be subject to much higher levels of tax. So, to counter this, you would need to take both a small salary and take your profits as dividends from the business. However before you can do this you need to produce a profit and loss form so this is where you’ll need the services of an accountant.
If you want to know more about when the right time to make the move from being a sole trader to a limited company is and whether you’re ready to make that move yourself. Get in touch with us here at DK Accounting. We can talk you through the process, what it involves, discuss where you are currently and if agreed that it’s the right time for the transition we can help you make the move.