If your sole trader business is steadily increasing its earnings, then it may be time to consider switching from a sole trader business to a limited company. But, you may be thinking, how do I do that? Well, lucky for you, our team are very experienced in this field. We have carefully crafted this informative blog to help you decide when is best to make the switch and how to do it in the most tax-efficient way.
The best time to change your sole trader business to a limited company is when it starts making a significant profit. This is because the amount you would pay in income tax and Class 4 National Insurance as a sole trader may be higher than the Corporation Tax you would pay as a limited company.
At Archimedia Accounts, we help clients make informed business decisions to increase their tax efficiency and ultimately pay less tax. If you are a tradesman looking for a better way to conduct your business, then contact our friendly team today.
What is the difference between a sole trader and a limited company?
Apart from the financial accounts and tax returns, a sole trader and limited company should be quite similar in how they run. They are both businesses and can trade and do everything else in the same way.
As a sole trader, there is no distinction between you (the owner) and the business, meaning in the eyes of the law, you are one and the same. So, after the profits are taxed, they essentially belong to you.
This sounds great, right? While it does come with its benefits, because sole traders are not legally separated from the business, they become personally liable for the overall financial health of their business and any business debts. This means your personal assets, including your home, could be at risk.
A limited company, however, is a separate legal entity in the eyes of the law. As a limited company, you don’t personally own the company’s profits; they are taxed separately, known as Corporation Tax.
As the owner of a limited company, you are only ever liable for the amount you have invested in the company. You will be taxed separately if you want to take money out of your business through salary, dividends, or other means.
Do sole traders need to register with Companies House?
No, sole trader businesses don’t need to register with Companies House. Instead, they only need to be registered with HMRC.
A sole trader submits a Self-Assessment tax return to HMRC only, whereas limited companies submit accounts to Companies House and HMRC. The directors of a limited company also submit a personal tax return to HMRC.
Operating your trade business as a sole trader
As a sole trader, you are self-employed, and your business is owned solely by you – the clue is in the name.
Sole traders don’t have directors and shareholders like a limited company, so the owner is the sole owner, making them fully responsible for the business.
There are also different legal responsibilities when operating as a sole trader.
Advantages of being a sole trader
As a tradesman, you probably want to save time and money when operating your business, right?
There are many advantages to setting up your business as a sole trader, including:
- Easier administration process
- More cost-effective administration
- No requirement to submit a balance sheet to any Government organisation
- Easier bookkeeping
- Accounting standards are less stringent
- Annual accounts don’t have to be filed with Companies House
- Better privacy
Disadvantages of being a sole trader
As with everything, there can be some drawbacks to operating your trade business as a sole trader, including:
- Increased personal financial risk
- Unlimited liability over debts and legal issues
- High-income tax
- You may appear more “casual” to high-end customers and suppliers
- Less tax planning flexibility
Operating your trade business as a limited company
Being a limited company means your business is a separate legal entity and is liable for its own debts and any legal claims brought against it.
You can of course, be a shareholder and company director, which will give you the same control of your business as a sole trader, although you may have to pay income tax if you draw money out.
Advantages of being a limited company
Deciding whether to run your trade business as a limited company can seem like a big step.
And while it is a pretty significant move, it does come with some interesting benefits that you may not have thought of, including:
- Reduced risk of personal liability
- Better legal protection
- Significant tax savings
- Flexibility over personal tax liability
- Protection of your company name
- Increased professional image and credibility
Disadvantages of being a limited company
While it may sound attractive to set up your trade business as a limited company, there are some potential disadvantages to watch out for, including:
- Higher set-up costs
- More administration
- Potentially higher accountancy fees – although tax savings will probably outweigh the cost of your tax planning is done well
- Company information is publicly visible on the Companies House register
How do I know which business structure is best for my trade business?
As a tradesman, choosing your business structure is an essential step in setting your business up for success and being more tax-efficient.
We suggest you take time to consider your current situation and your business’s financial health and explore the benefits of changing your business entity.
Whether you choose to run as a sole trader or a limited company should be a personal choice based on your individual circumstances.
However, the support of our tax and accounting specialists can make the decision feel much more manageable. We will advise you on the various pros and cons of sole traders and limited companies and help you find the right option with the most tax benefits.
How can Archimedia Accounts help my trade business?
At Archimedia, we help trade businesses make more significant financial decisions and better tax savings. We are your experienced partner!
We offer regular tax planning sessions throughout the year and learn all we need to know about your business and family’s financial situation. The aim is to save you and your family as much tax as legally possible while thinking about your future financial security.
We have over 30 years of experience as tax and accounting professionals. Our owners, Barbara and Chris, also have a large, successful property portfolio, and in your regular tax meetings, they can explore the potential of building your own property business as well.
Contact us today to start growing your trade business in the smartest way.
Sole traders and limited companies each have their perks and downfalls, which will vary from business to business. We have explored the two different business structures equally, so you should have an idea of what you are looking for when it comes to the future of your trade business.
It could be more tax efficient to trade through a limited company as profits increase because the tax and Class 4 National Insurance you’d pay as a sole trader could be greater than Corporation Tax.
However, this is usually most beneficial if your business is making profits of around £30k upwards. If you are making less income, then sticking to being a sole trader business might be an easier and more affordable option.