We are frequently asked whether it is worth moving a sole trade or partnership into a limited company.

The decision is often based on an individual’s circumstances, the type of business they run and their plans for the future.

For a lot of people, the choice will be profit driven, for example:

– Their profits have increased and as a sole trader/partner they are being taxed partly at higher rate on their profits/profit share despite not taking the money out of the business; OR

–  They may have fluctuating profits each year, such as property developers, where one year they may not have any profits and waste their personal allowance and basic rate bands and in the next year they are paying a lot of tax at higher rate bands when a development is sold.

How limited companies are taxed can help in these situations, as the structure is more flexible in terms of future planning.

Limited liability is another key consideration as they may want to give some protection to their personal assets (for example their home), so are willing to incorporate even when their tax bill is not affected.

In advising on incorporating a trade, some of the key things we consider are:

Will incorporation achieve what the individual wants?

We ensure clients understand how limited companies work and any potential pitfalls for their personal circumstances.

What assets will be moved in the limited company?

We take into account any potential consequences for the future such as inheritance tax and control over that asset/retirement plans.

Consideration should also be given to any private use of the asset which will cause adverse tax issues for the individual if owned by the company.

What are the future plans are for that asset? (ie will there be more or less tax if that asset is sold in the future and is owned by the company rather than the individual?)

How can the trade be moved into a limited company in a tax efficient way?

Minimising the tax charges, by using tax elections if possible, but also maximising the monies owed back to the individual as part of the “sale” of the business to the limited company (which can be withdrawn by the individual at a later point).

How will the limited company be run and what are the accounts and tax compliance requirements?

We talk through the practicalities of meeting the compliance requirements of a limited company (which we can of course deal with), how corporation tax works on profits and the personal tax on withdrawing monies from the business.

Limited companies are not for everyone, but they can provide a good structure for your business if the right advice is given from the start. Making the change to a limited company and starting to trade through one can seem daunting, but we are there to assist with this – providing regular help and guidance along the way.

If you would like to discuss whether incorporation is a good move for you and your business, please get in touch with your normal M+A Partners contact, speak to me on 01953 452077 or email mary-anne.sargeant@mapartners.co.uk 

Written by

Mary-Anne Sargeant

Mary-Anne Sargeant has been the Partner of our Attleborough office since 2010. Mary-Anne and her team provide professional accountancy and tax advice for a broad spectrum of clients, from brand new start-ups to well established family and owner managed businesses and from private individuals to companies.

Find out more about our Attleborough office by downloading our factsheet below.