If you think it might be time to take the next step and register your sole trader business as a limited company, there are several important considerations to make first. Possibly the most important is whether or not you should involve an accountant – and, if so, how soon in the process you should get them on board, so you get the biggest bang for your buck.
After all, you want to make sure you’re on the right track and setting yourself and your business up for success.
When is the right time to incorporate my business?
You’ll know it’s likely the right time when your profits start to grow because it can be more tax-efficient to own a limited company, but this depends on lots of other factors, such as how much you earn, and any other income you may have.
There are other potential benefits too. The nature of a limited company means it’s a legal entity in its own right, separate from its owners, so your personal assets are protected. Legally, you are not your company, and so you can’t be held personally responsible for any company debts or issues that arise.
Essentially, the bigger and more successful your sole trader business, the more likely it is that you would benefit from incorporating it. But of course, this all depends on your own personal circumstances – which is why speaking to an accountant first is so important!
How do I incorporate a limited company?
First things first, in order to set up a limited company, you need to register your business with Companies House. This can be done in a variety of ways: online, through the post using an IN01 form, or via a company formation service such as that offered by an accountant.
Companies House will then notify HMRC on your behalf (or you can opt to register for Corporation Tax at a later date – as long as you do so within 3 months of starting to trade).
You’ll need to supply Companies House with some personal information as part of the incorporation process, including your full name, address, and National Insurance number.
This also extends to anyone else involved in key roles, such as any other company directors or shareholders. If you’re concerned about privacy and don’t want your private address shared on the Companies House register, you may want to consider using a registered office address for the business. Most accountants will offer this as part of their service, but it’s worth double-checking.
Companies House will also want to know the nature of your business, using an SIC code to classify the type of work you’re involved in. You can search for the appropriate SIC code on the Companies House website.
You (as the ‘subscriber’ or original shareholder) will then need to make a statement of lawful purpose and provide a Memorandum of Association. This is basically just a formal agreement between the shareholders agreeing to form the company, along with the Articles of Association (written rules which explain a director’s powers and what the shareholders are entitled to).
What taxes do limited companies pay?
The main tax you need to know about as the owner of a limited company is Corporation Tax.
This is due no later than 9 months and one day after a company’s financial year ends, with the rate of it depending on the taxable profits reported by the company.
- 19% for companies reporting profits of £50,000 or less
- 25% for companies reporting profits of £250,000 and over
- A marginal rate if your profits fall between these two thresholds
It’s important to note that if you fail to pay Corporation Tax on time, you could be made to pay surcharges and interest on the original amount – so don’t fail to pay!
Other taxes you might need to be aware of as the owner and director of a limited company include:
- Dividend Tax, which is paid by shareholders on the dividend payments they receive from the company’s profits (the exact amount of Dividend Tax a shareholder has to pay depends on their total income, and how much of that income is from dividends)
- National Insurance Class 1 (Primary), which an employer deducts from an employee’s wages if they are younger than State Pension age and earn more than the Primary Threshold
- National Insurance Class 1 (Secondary), which an employer has to pay on an employee’s earnings above the Secondary Threshold (£5,000 from April 2025)
Should I speak to an accountant before I change my sole trader business into an incorporated one?
Well, you could try and go it alone, but unless you’re a qualified accountant yourself (in which case I think you might be lost) there are likely things you don’t know about, and so it’s generally a good idea to seek the help of an expert in the field.
Your own dedicated accountant can ensure you’re making the right decision and assist in the whole process, making things as smooth and easy as possible.
After all, there are strict penalties if you mess up (e.g., failing to pay your Corporation Tax), so why not just cut out the guesswork and all but eliminate the risk?
You’ll also get more sleep.
Visit our accounting support hub for more help, or to ask a free tax question!
