Should You Switch From a Sole Trader To a Limited Company?

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Have you been thinking of switching from a sole trader to a limited company? By doing so, you can legally separate your business from yourself. This has many advantages, but it can also have disadvantages. Here are just a few things to expect from becoming a limited company.

You could pay less (or more) tax

Limited companies are required to pay a corporation tax of 19% on profits (soon to be 17% as of 2020). This is a lot less tax than many businesses would otherwise pay when operating as a sole trader. However, for some companies, it could be a lot more than they’re currently being taxed. By knowing what tax bracket you currently fall in as a sole trader and by having a good idea of future profits, you can determine whether switching to a limited company is a better deal. Tax laws are constantly changing with new legislations constantly coming in such as IR35 as explained at https://www.qaccounting.com/ir35/. It’s worth reading into these tax laws before making the switch.

You won’t be personally liable for company debts

An advantage of switching to a limited company is that your business debts and personal debts become separate. This means that debt collectors cannot seize personal possessions for a business debt and that they cannot seize business-owned goods for a personal debt. Whilst you will hopefully never need this added protection, it is useful to have.

Your company name will be protected by law

Once your company name is registered as a limited company, it becomes protected by law. This prevents any other company from using the same name as you. As a sole trader, you do not have this legal protection. This can be another benefit of switching to a limited company.

You could find it easier to seek funding

It can also often be easier for a limited company to take out loans and finance schemes. Once your business becomes a separate entity, it develops its own credit score. This could make it easier to get accepted by lenders. There are even some loans that are only available to limited companies as found at this site https://www.capify.co.uk/capify-loans-limited-companies/.

You’ll have to complete more paperwork

A big drawback of switching to a limited company is the added amount of paperwork. As a sole trader, you must complete a self-assessment tax return each year. As a limited company, you must complete a set of accounts, an annual return, a corporation tax return and a personal tax return. This added admin can be time-consuming and you need to be sure that you have the time to handle it. You can read more about the paperwork here at https://www.itcontracting.com/limited-company-hassle/.

This is a collaborative post.