Transferring your business from sole trader to a limited company

September 22, 2021

If you are trading as a sole trader, you can transfer your business to a limited company. By forming a limited company, your business will see some added benefits.

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Benefits of forming a limited company

Business liability

By forming a limited company, you can separate your business liability from your personal liability. Therefore, if anything goes wrong with your business’ finance, it will not affect you personally.

For example, if your business cannot pay a debt, it will not affect your house or other assets.

Separate entity

A limited company is a separate entity (person). Therefore, you can separate yourself from the business by forming a limited company.

Taxable benefits

Overall, your take-home pay will be higher if you form a limited company. If you are a higher rate taxpayer, with a tax rate of 40% or higher, then a limited company is the best option for you.

Transparency and credibility

As a sole trader, you are required to record your transactions yourself and manage your books more accurately and regularly. However, a limited company will be more transparent and thus making your accounts easier to manager, something which is more acceptable by your customers/clients.

We will run a director payroll

To utilise your personal allowance, we will run a director’s payroll on a regular basis for your business. A director payroll will help you to save around £2,400 yearly on your tax bill.

Delay in VAT registration

As a limited company is a separate entity, you can delay your business’ VAT registration until you reach the VAT threshold which is £85,000.

You can claim tax-free dividend allowance

When we prepare and submit your director’s self-assessment tax return, we can claim dividend allowance. Overall, you can claim tax-free dividend allowance of up to £2,000.

You can apply for flat rate VAT

Flat rate VAT means that you pay a lower VAT rate than the usual rate of 20%. You can apply for a flat rate VAT and save money on your VAT bill.

Problems with forming a limited company

There are a lot of compliances

Once you form a limited company, you must ensure you comply with both Company and HMRC regulations. There are multiple deadlines you are required to meet, and failure to meet these deadlines will result in multiple penalties and/or fines.

Complicated accounts preparation

As per a legal requirement by the Companies Act, you are required to prepare a statutory set of accounts according to the Financial Reporting Standard. We recommend hiring an accountant to prepare and file your company accounts and corporation tax to meet the requirements.

Not ideal if your sales are low

If your company sales amount to lower than £25,000, it is not ideal for you to form a limited company as the cost of maintaining a limited company will be higher than overall benefits.

Other technical benefits

Trading loss relief available

If the owner of a business transfers the business into a limited company, there will be a change in the legal ownership of the business and the seller is deemed to have stopped trading.

Any trading loss that the seller has before the date of transfer for the business cannot be carried forward and set against the limited company’s trading profits.

On the other hand, there is a relief available that the sole trader can use if their business is transferred to a limited company. This is provided that they meet the following conditions:

The consideration is in exchange for shares in that company which must be greater than or equal to 80% of the shares.

The seller of the business continues to hold those shares throughout the tax year in which the relief is given.
The company continues to carry on the transferred business.

The seller may set unrelieved trading losses against their first available income from the company in the most tax efficient manner.

If the seller receives dividends from the company, they can set off the unrelieved trading loss against the first dividend they received.

Example

Elliott transferred his manufacturing business into Elliott Ltd. for 10,000 shares in the company which he plans to hold.

When he transferred his business to a limited company, he found that there were unrelieved trading losses of £20,000.

Elliott received dividends of £8,000 from the company.

Ultimately, Elliott can relieve the trading loss he meets the following conditions:

The consideration is wholly for the shares, so Elliott can continue to hold those shares.
Elliott Ltd. continues to carry on the transferred manufacturing business.

Loss Relief

The dividends received by Elliott are £8,000. The c/f loss is £8,000 and the loss is to be carried forward by £12,000 (£20,000-£8,000).

Contact TaxCare today to get advice on how to transfer your business into a limited company.

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