Perhaps you’ve been thinking about changing your status from sole trader to limited company or expanding your business into a limited company. Perhaps you’re running out of ideas, but feel like you need some help in making the transition.
Maybe you’ve already started the process, but lost momentum and find yourself wondering when should I change from sole trader to limited company. This guide will help you to decide and give you all the information you need to make the right decision for your business.
When your profits reach the higher rate tax band
When your profits reach the higher rate tax band, you will pay more tax on a limited company. This is because the company’s profits are taxed at a higher rate than those of an individual.
For example: If you have £100,000 in profits and are paying 30% income tax, then as an individual with no other income or gains (i.e., all their money comes from employment), they would be liable for £30k in total income tax payments — but if they formed a limited company with another partner and then paid themselves £50k each year as salary/wages — then this means that their overall taxable income would increase by 50%!
Expanding from an individual to a team
If you want to start a business with your partner or family, then it’s probably best to consider the impact on your personal finances.
It’s also worth considering whether or not you’ll be able to continue working full-time while running the business. This may mean that you need more time at home, which could mean less time for socializing with friends and family members.
If things go wrong during this transition period (for example if one of them loses their job), then there’s no guarantee that they’ll be able to find another job quickly enough so as not to lose any money from their shareholding position in the company.
When your business is growing so much that you have lots of spare cash in the bank
If your business is growing so much that you have lots of spare cash in the bank, then a limited company may not be for you. Because this type of legal structure does not allow for borrowing or loans, it may be better to start your own company rather than borrow funds from others.
However, if this isn’t an option and you want to take advantage of all the benefits provided by a limited company but still keep some control over how much money comes into your business, then this might work better for you.
When you are thinking about selling your business
If you are thinking about selling your business, it is important to make sure that you can show a company has been trading for a while. A good indicator of profitability is the amount of money that has been generated by the company and how much profit has been made from this.
If you want to sell your business, then it’s essential that this process goes as smoothly as possible. You need to be able to show that your company is profitable so potential buyers will know they will get value for money when buying shares in its stock market listing.
The best way of doing this is by keeping records such as accounts receivable or invoice dates alongside invoices paid out on time which would allow potential buyers or investors to see just how successful their investment would be over time if bought into at an early stage (before things go wrong).
Conclusion
There are many reasons why you might want to change from an individual to a limited company, but the most common reason is that your profits have reached a higher rate tax band. If this is the case then it’s worth doing some research and making sure that there aren’t any other factors that might make it more difficult for you in hindsight!
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