When to incorporate a small business

At the beginning of your small business journey, you need to choose a legal structure that suits you. But how do you know when to change your business structure to a limited company due to growth or new opportunities? This article looks at when to consider incorporating your business including?

• What is incorporation?
• What’s the difference between a sole trader and a limited company?
• When should you consider incorporating a small business?
• How do you incorporate a small business?

Incorporation is the process of legally registering a limited company. You can incorporate a small business even after running it as a sole trader set up previously. If you’ve been running your business for a while before deciding to incorporate as a limited company, you’ll need to consider the differences between the two types of company structure.

A sole trader has complete control of all aspects of the company, including all profit earned after taxes. You’re also personally liable for any debts. It’s easier to manage business finances as a sole trader as less tax and financing reporting is required. Operating as a sole trader is the simplest business structure, making it a popular choice for lots of small business owners.

A limited company is a structure where the business is its own legal entity, separate from the owners (the shareholders) and the people who manage it (directors). The company can still be owned and operated by one person, where the owner acts as both the sole shareholder and director. The business’ finances are entirely independent of the owner.

Limited company owners can act as both shareholders and directors but pay themselves as employees via PAYE. As you’re employed by a limited company, this means that you’re no longer a self-employed person in the eyes of HMRC.

Limited companies also have to submit annual accounts, which are made public. The reports will include your profit and turnover, as well as detailed statements of business spending. You’ll also submit your corporation tax returns. Income tax implications differ for sole traders and limited companies, with sole traders being taxed on their income after profit through self assessment, while limited companies pay corporation tax.

Your business structure can impact every aspect of your business, from your bottom line to the paperwork and tax reporting you have to manage. So there are many things you should consider before making the change. 

Here are some questions to ask yourself to decide if it’s time to incorporate:

• Will you pay less tax by operating as a limited company? Once you’re hitting a certain profit level, it might be more tax-effective to incorporate your business.
• Will you receive a higher take-home pay by using a limited company? Consider if you’ll be taking home more, with the added costs of running a limited company.
• Will a limited company’s more ‘professional’ image help your business attract more customers and grow the business?
• Will you benefit from limited liability, and do you need your personal assets (your home, car, personal savings) to be protected if the business goes bankrupt?
• Do you want to bring in investors, secure funding, or find business partners in the future?
• Are the other benefits listed worth the extra filing, record keeping and administrative requirements that limited companies are legally required to manage?

You might want to get an accountant or financial advisor to support your decision. They have the experience to help you make an informed choice and they can support you after incorporation. Retaining the services of a financial advisor or accountant will also save you time as they can assist with the more rigorous financial responsibilities a limited company faces.

If you decide to incorporate your small business, these steps will help you get ready to trade as a limited company:

• You can register your business for free with Countingup. This company registration process is free when you open a Countingup account and spend £50 on your card within 30 days (terms apply). You can operate under the name you were using as a sole trader or choose something new. Always check that your business name is available, or you could face legal issues with Companies House
• It’s also important to check officer details (like address etc) are correct during the company registration process
• Next set up your salary payments through PAYE with HMRC as you’re going to pay yourself as an employee
• You’ll also need to register for Corporation Tax, and if your business is likely to turn over more than £90,000, you’ll also need to register for VAT
• Finally, use an online form to inform HMRC that you are deregistering as self-employed
• Limited companies legally must have separate accounts from the owner’s personal ones, so set up a business current account if you don’t already have one
• Transfer the sole trader company and any assets to the new business. You could seek support from an accountant or financial advisor for this process, as it can be complicated. Simply put, your new company must buy assets (e.g., cash, equipment or vehicles) from the old company. The value of the assets can be paid immediately or treated as a loan to which you’ll repay over time

If you change your mind and decide to operate as a sole trader again, you can notify HMRC of the change and re-register as self-employed. 

Registering your new company is easy with Countingup: 

• We’ll register your business directly with Companies House (we’re an authorised agent)
• The £12 Incorporation fee is on us when you open an account and spend £50 on your card within 30 days (terms apply)
• Apply now and get your Certificate of Incorporation
• Get Countingup business current account with a 3 month trial, with no subscription fees

Find out more here.