When should I go from Sole trader to Limited Company?

Limited blog header

When should I go Limited?

It’s decision time – are you going to follow that dream you’ve always had? Are you going to start your own postal brownie service? Retrain as a dog groomer? Sell your artwork? Go it alone after spending years working to put money in someone else’s pocket?!

 

Obviously, we hope that answer is a big, fat YES!

 

That’s one decision down, and before you get to the point of owning your own private jet, or buying your own island, there will be a few more decisions to make .. one of which that will crop up early is – when should I switch from being a sole trader to a limited company?

If any of you are keeping your main employment, and setting up your dream as a bit of a side hustle to begin with, the answer is probably pretty soon!

If you’re using up your tax-free personal allowance within your employment, then you are going to be paying 20% (or more!) tax on ALL PROFIT YOU MAKE as a sole trader. 

However, if you’re making enough elsewhere to not need that money, you could choose to leave the profit after you 19% corporation tax in the business as ‘retained earnings’, for a rainy day, or for when you take the plunge and go it fully alone!

When you start making more, as a company director, you’re entitled to £2000 a year in tax-free dividends – yes, TAX-FREE! And, if you have a significant other you can appoint as a company director, they too can have £2000 in tax-free dividends…!

 

Great, hopefully that’s sorted some of you out! Now, for the rest of you lot, who are already working full-time on your own business, the answer may not be so cut-and-dried.

 

In a very rough sense, we could say that if your business would be making enough for you to employ yourself, pay yourself the tax-free salary (£12570), it would be a good move, and even better of a move if there will be 2 or more of you employed on that salary. I don’t have the time (or the brain power to be honest!) to go deeply into at what point as a sole trader you’ll be paying NI, and therefore the exact number to the penny of turnover and profit you’ll need to make this a viable plan, but we will be able to give you much better insight when you book a 15 minute Discovery Call with us.

In the name of transparency, we do need to point out that incorporating will likely incur higher fees in terms of accountancy, and potentially other areas, than being a sole trader would. That’s why there really is no ‘one size fits all’ approach here! And also why we would love to have a chat with you about your specific circumstances, to see what would best suit you and your lifestyle.

Before you make your decision though – it’s not all about the numbers. Yes, as accountants, we DID just say that! Our next blog will talk about the ‘non-financial’, shall we say, pros of moving your sole trader business to a limited company.