If you’re a sole trader, you may have heard that there are lots of advantages of incorporation such as saving tax. This could be the case, but there is a lot you should consider before you decide whether trading as a Limited company is best for you.
Advantages of incorporation
Switching from sole trader to limited company could save you tax
There could indeed be some tax savings to be made by making the switch from sole trader to limited company. While sole traders pay Income Tax on profits and classes 2 and 4 National Insurance, limited companies pay Corporation Tax on profits, which is a lower rate than Income Tax, and no National Insurance.
Limited companies don’t generally have to make Income Tax payments on account, but sole traders do. While this is not in itself a tax saving, the timing of the payments on account can sometimes cause cashflow issues for some businesses.
However, it’s important to bear in mind that limited companies are not entitled to a Personal Allowance so they pay tax on ALL profits. And since the taxation of dividends was changed in April 2016, the tax savings aren’t as significant as they used to be.
It’s important to discuss any potential tax savings carefully with your accountant and to ask them to calculate what you could save. This will depend on your business’s circumstances, and, in particular, whether you have any other sources of income.
Limited companies may attract investment more easily
If you are looking for investment in your business, incorporation could be an advantage for you. As a limited company, you should be able to sell shares in your business to an investor relatively easily.
Sole traders, on the other hand, cannot seek investment, unless they go through the complex process of turning their business into a partnership.
You would have limited liability protection
Limited liability is a form of legal protection that prevents individual company directors from being held personally responsible for their company’s debts or financial losses. Because a limited company is a separate legal entity from its directors, the company can own equipment, incur debts and pay bills in its own right.
That means that if the company is ever sued, your own personal assets, such as your house and car, cannot generally be seized to pay the debt, unless, for example, you have given a personal guarantee to a company creditor or you have deliberately not paid your tax debts.
If you are a sole trader, on the other hand, your own assets could be seized to pay a business debt, because you and the business are legally the same entity.
Disadvantages of incorporation
As well as the advantages of incorporation mentioned above there are also some downsides. Check out our post on some of the Disadvantages of incorporation.
Helping you with the Advantages of incorporation
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