When changing from being a sole trader to a limited company, there are some important things to think about. This change can affect your money, responsibilities, taxes, and how you run your business. Here are the main points to consider:
Legal Status: As a sole trader, you work under your own name. If something goes wrong, your personal belongings could be at risk. A limited company is its own legal entity, which means your personal assets are safer.
Incorporation: To change to a limited company, you need to register it with Companies House. You'll also need to file some papers and keep up with legal rules. As of 2023, there are over 4 million registered companies in the UK, showing that this option is very popular.
Capital Requirements: Limited companies can find it easier to gather money by selling shares. According to the Office for National Statistics (ONS), about 80% of UK businesses are small and micro businesses that can get better access to money when they are limited companies.
Taxation: Sole traders pay taxes on their profits like personal income, which can be as high as 45% for those making a lot of money. Limited companies pay a corporation tax of 19%, which might be better for bigger businesses. However, there are plans to raise this tax to 25% for profits over £250,000 starting in 2023.
Accountability: Limited companies need to prepare and submit annual accounts and a confirmation statement. Sole traders have simpler reporting rules. Not following the rules can lead to big fines; in the UK, late filings can cost more over time.
Audit Requirements: Bigger companies have to have their accounts checked by an auditor. Sole traders usually don't need to go through this unless they meet certain conditions.
Decision-Making: As a sole trader, you make all the decisions by yourself. But with a limited company, there may be shareholders and a board of directors involved, which can make decisions more complicated. Having other stakeholders can help keep things in check, but it might reduce your direct control.
Dividend Distribution: Limited companies can give out profits as dividends, which can be more tax-friendly than taking a salary as a sole trader.
Switching from a sole trader to a limited company can help your business grow and manage risks better. It's important to think about your business goals, money situation, and ability to follow rules before making this change. Talking with a financial advisor or accountant can help you understand the details of this transition.
When changing from being a sole trader to a limited company, there are some important things to think about. This change can affect your money, responsibilities, taxes, and how you run your business. Here are the main points to consider:
Legal Status: As a sole trader, you work under your own name. If something goes wrong, your personal belongings could be at risk. A limited company is its own legal entity, which means your personal assets are safer.
Incorporation: To change to a limited company, you need to register it with Companies House. You'll also need to file some papers and keep up with legal rules. As of 2023, there are over 4 million registered companies in the UK, showing that this option is very popular.
Capital Requirements: Limited companies can find it easier to gather money by selling shares. According to the Office for National Statistics (ONS), about 80% of UK businesses are small and micro businesses that can get better access to money when they are limited companies.
Taxation: Sole traders pay taxes on their profits like personal income, which can be as high as 45% for those making a lot of money. Limited companies pay a corporation tax of 19%, which might be better for bigger businesses. However, there are plans to raise this tax to 25% for profits over £250,000 starting in 2023.
Accountability: Limited companies need to prepare and submit annual accounts and a confirmation statement. Sole traders have simpler reporting rules. Not following the rules can lead to big fines; in the UK, late filings can cost more over time.
Audit Requirements: Bigger companies have to have their accounts checked by an auditor. Sole traders usually don't need to go through this unless they meet certain conditions.
Decision-Making: As a sole trader, you make all the decisions by yourself. But with a limited company, there may be shareholders and a board of directors involved, which can make decisions more complicated. Having other stakeholders can help keep things in check, but it might reduce your direct control.
Dividend Distribution: Limited companies can give out profits as dividends, which can be more tax-friendly than taking a salary as a sole trader.
Switching from a sole trader to a limited company can help your business grow and manage risks better. It's important to think about your business goals, money situation, and ability to follow rules before making this change. Talking with a financial advisor or accountant can help you understand the details of this transition.