Sole Trader to a Limited Company - Factors to consider.
Many self employed people start out as a sole trader, however as the business grows they may consider starting a limited company. There are many factors to consider before making this decision. It is important you take time to consider this important decision as well as seeking professional advice from an accountant.
One of the main benefits of a limited company is you won't be personally responsible for any losses the company makes or for claims made against the company. As a sole trader you are personally responsible for losses.
However, if the limited company has few assets then banks can require loans to be guaranteed against a directors personal assets - for example their home.
Separate Bank Account
This isn't a legal requirement but I would strongly recommend that you set up a separate bank account for the limited company. This is because you will be personally taxed on salary and dividends paid by the limited company - using a personal bank account for the limited company can make this very complicated. In addition, many banks won't allow you to use your personal account for a limited company - it is very likely to go against the terms and conditions of the account.
Payment of Income
For a limited company your personal income will be paid by salary or dividends or a combination of both. Consult an accountant when deciding on and in what combination you would like these payments to be made to ensure the correct tax is paid and that payments are accounted for correctly.
As a sole trader you pay tax on your income via self assessment - this can include Class 2 and Class 4 National Insurance in addition to Income Tax. You will not be liable for Corporation Tax as a sole trader.
Limited Companies are liable for Corporation Tax - currently 19% of profits for the financial year of no more than 12 months. You will also be liable for tax personally for any salary or dividends paid to you by the limited company.
You will need to be aware of IR35 rules as a limited company. IR35 is intended to combat tax avoidance by workers supplying services to their clients via an intermediary limited company, this applies where the worker would be designated as an employee if the intermediary company was not used. As a limited company director you will need to know if any contract you take on is subject to IR35 rules - HMRC can impose strict penalties where rules have been broken!
These are just some of the factors to consider when becoming a limited company. It can be very beneficial to your business provided the limited company is set up correctly and you understand the rules and costs involved.