Every business chooses a legal structure that suits them when they begin their journey, but how do you know if it’s the right time to change the structure due to growth or new opportunities? This article will look at when you should consider incorporating your business by diving into the following areas: 

  • 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?

What is incorporation?

Incorporation is the process of legally registering a limited company. Incorporation can happen before trading as a new company, or an existing company can make the change if it has run as a sole trader up to that point. 

If you’ve been running your business for a while before you decide to incorporate, you’ll need to consider the differences between the two types of company structure.

What’s the difference between a sole trader and a limited company?

A sole trader has complete control of all aspects of the company, including all profit earned after taxes, but will also be personally liable for any debts. It’s easier to manage business finances as a sole trader as less tax and financing reporting is required. 

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 businesses finances are then entirely independent of the owner’s.

Limited company owners may act as the shareholder and director but pay themselves as employees via PAYE. This means that you will no longer be 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 tax returns for Corporation Tax instead of through a self-assessment. 

When should you consider incorporating a small business?

The choice you make about 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. 

Some questions to ask yourself to decide if it is time to incorporate are:

  • Will you pay less tax by operating as a limited company? Once you’re hitting a certain profit level, it may 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 associated with running a limited company.
  • Will a limited company’s more ‘professional’ image help your business attract more customers/clients 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?

It’s essential to weigh up the options properly because you may end up spending too much time on administrative tasks when you could be growing the level of profit you’re making instead. 

You may want to enlist the help of an accountant or financial advisor to support your decision. They have the experience to help you make an informed choice, and they can support many aspects of your business 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.

How do you incorporate your small business?

If you decide to make the change, then follow these steps to incorporate your business and get ready to trade as a limited company:

  • You can register your business for free with Countingup. This registration is the incorporation process and will cost you £12. 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.
  • First, get in touch with HMRC to inform them of the change to your company structure.
  • Next, with HMRC, set up your salary payments through PAYE as you’ll be paying yourself as an employee. 
  • You’ll also need to register for Corporation Tax, and if your business is likely to turn over more than £85,000, 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 one, so set up a business current account if you don’t already have one.
  • Transfer the sole trader company and any assets it has 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. 

Incorporate your company for free 

Registering your new company is easy with Countingup: 

  • We’ll register your business directly with Companies House. 
  • The £12 Incorporation fee is on us!
  • Apply now and get your Certificate of Incorporation in hours.
  • Get a 2 in 1 Countingup business current account once you’ve set up your company.

Find out more here.