Sole Traders: Should you Incorporate?

If you work as a sole trader, the decision to incorporate your business and trade through a limited company is a major step. There are various factors that should be considered carefully before you make a decision. Although there’s no set timeline as to when you should incorporate, read on as we guide you through the benefits of going limited and the key considerations you should factor in.

Limited Liability Protection

When you operate as a sole trader you and your business are the same legal entity which means you have unlimited personal liability for the debts of the business. This means your personal assets can be at risk if your business encounters financial difficulties.

When you incorporate as a limited company, the business becomes a separate legal entity from you. This means that your personal assets, including your home and investments, are generally protected from any business liabilities. This provides increased personal financial security as well as peace of mind. If your business activity involves higher risks or liabilities, incorporating can offer you significant financial protection.

Tax Planning & Efficiency

One of the key advantages of a limited company structure is that it provides increased opportunity to leverage tax efficiencies compared to operating as a sole trader.

Shareholders and directors of limited companies can therefore benefit significantly due to increased flexibility to control their tax affairs. Your pay can be split between a combination of dividends and salary which can result in a reduced tax liability and increased take home pay. Limited companies are liable for corporation tax which has different rates to personal income tax.

Growth and Company Perception

Incorporation can be very beneficial in terms of growing your business. Trading through a limited company provides increased credibility and creates a more favourable and professional impression. Perception of your business is improved with potential clients which will make it easier for you to secure new work and larger contracts as well as financing and investment, all of which can help scale up your operation.

Some clients will only work with limited companies so incorporating can provide you with a significant competitive advantage over sole trader competitors operating in your sector.

Exit and Succession Planning

Business owners should always have long term plans in place and part of that involves an exit or succession plan for when you decide to retire or sell your company. Structuring as a limited company can be very advantageous in this respect. Transfer of ownership is much simpler for limited companies as it can be facilitated through the sale of shares which makes it much easier to transfer ownership to members of your family, your employees or new investors

Increased Administrative and Compliance Requirements

One of the advantages of being a sole trader is that there are less regulatory, administrative and compliance requirements compared to a limited company. Limited companies have additional responsibilities including filing annual accounts and confirmation statements with Companies House, complying with financial reporting standards, maintaining a statutory register and adhering with company law requirements.

Taking care of all this is a significant task so you should consider carefully whether you have the knowledge and time to meet these obligations. If you’re unsure, appointing an accountant to handle this for you is a sensible choice.

How Gorilla Accounting Can Help

Every sole trader’s circumstances are different and it’s recommended to seek professional advice from an accountant about whether incorporating is the right choice for you based on the current position and needs of your business, as well as your future goals and aspirations. This includes evaluating the legal and financial implications of going limited to enable you to make an informed decision about whether it’s the right move for you.

We understand that forming a limited company can seem daunting but Gorilla’s team of expert Company Formation Accountants can assist you with setting up your limited company from start to finish. We make incorporation simple. We’ve helped thousands of our customers set up their limited companies and can assist you every step of the way. We can even have your company formed the same day!

Before you start our company formation process, you need to choose a company name. You can check if the name is available on the Government’s company name availability checker. You can use any name you like provided it’s unique and meets the Government’s guidelines. It’s worth taking your time on this to ensure that the name you choose is just right and not too similar to another company’s name or trademark.

You’ll also need to choose a registered office address. This is where official documents will be sent to, including correspondence from HMRC. If you use your personal address it will be in the public domain as it will be available on Companies House. If you’d prefer to protect your privacy,

Gorilla offer a registered office service for just £10 +VAT per month which means if you appoint us, your tax and financial correspondence can be dealt with quickly by your own dedicated accountant without you having to forward it on.

Next you will need a business bank account. This is mandatory due to your limited company being a separate legal entity from you. Funds held in the business bank account will belong to the business. They only become yours once they have been paid into your personal account. Gorilla Accounting has partnered with Mettle, the 100% free business bank account by NatWest and you can apply for a Mettle account in minutes here.

If you decide to set up a business bank account with your personal bank, our team will assist in providing any information required. Newly formed companies also may need to register for VAT.

For just £100 + VAT our full, expert Company Formation service includes:

  • Registration of your company with Companies House
  • Certificate of incorporation
  • Share certificates
  • Assistance with a Mettle business bank account application
  • Memorandum and articles of association

If you’re looking for guidance on the best business structure or would like to incorporate, our expert accountants are on hand. Give us a call on 0330 107 9674 or request a call back here.