Whether working as a contractor or building your own sole trader business, one question always seems to be on the horizon – when’s the right time to incorporate as a limited company?
There are other options, of course. Businesses can become partnerships and as we know very well at ICS Accounting, many contractors like the security of an umbrella solution. All the same, incorporation is almost expected to happen at some point.
But what’s the right time to make that decision? What should you consider?
Key Factors
Complexity
Sole tradership is very straightforward. Tax obligations are relatively simple, reporting is comparatively easy, and you don’t even technically need a separate business bank account (although setting one up as soon as possible is still highly recommended).
It’s often the case that experienced sole traders are keeping the records to the same level of detail that limited companies have to, but even then the tax liabilities and opportunities are different. The level of administrative burden can also be very different, although as in many cases both types of business outsource complex administration to accounts and the like, this can be less of a factor.
Taking Payment
There are radically different structures for dealing with your own individual income between business structures. These affect both how much it’s likely you can draw based on your income and what your tax looks like.
In particular, once a sole trader reaches higher rates of income tax, the rate is much higher than a limited company owner will tend to deal with.
Privacy & Risk
Much more information is disclosed to Companies House for a limited company than has to be public for a sole trader. In addition, limited company owners and directors bear much less personal responsibility for personal debts due to limited liability, while a sole trader is the same entity as their business.
Perception
One thing you may find as a sole trader is that investors and clients will sometimes shy away from a sole trader. Whether that’s concern over financial liability or perception of how seriously the two types of business are taking it is a much more complex question, but to some extent it’s irrelevant – it’s still something to take into account.
When Should You Make the Change?
While there’s no hard and fast rule, there are a number of things to think about.
Most crucially, if you’re working with large sums or if your earnings are getting high, the liability risk means you should be thinking about this earlier than other business owners might.
Incorporation is also often done at the start of a planned period of growth, so that one complication can be brought out of the way ahead of time.
However if your business is part-time or you’re working in a trade, the sole trader model will likely be appealing for a lot longer due to the straightforward nature and reduced admin time.
If you’re uncertain whether your current plans should be making you think about incorporation, why not drop us a line? We’ll be happy to give you specific advice.
