Most small businesses begin as sole traders. It’s cheaper and has less administrative duties. However, when a business begins to grow so will the needs of the owner. Owners will look for ways to reduce their personal liability and have a more tax efficient structure. A limited company offers these advantages.
There are 2 options available to those wanting to incorporate their sole trader business to a limited company.
Option 1 – Incorporation Relief
Incorporation relief is the typical route to incorporating sole traders. As a result, a whole or portion of the business can be transferred to your limited company. This can be done without being charged capital gains tax (CGT)*. In return for transferring your business, you receive shares in the company.
*CGT is deferred until the individual sells his shares in the limited company.
Option 2 – Capital Gains Tax
It may be beneficial to pay CGT upfront on the sale of your business to the company and not for incorporation relief.
Whilst this may incur a tax charge on transfer it is possible to utilise the sale in the form of a director’s loan account. This allows an individual to withdraw cash in the future without any personal tax charge.
Benefits of Incorporation
- Your liability is limited. Therefore, if something goes wrong you are not personally liable for any debts incurred by the company.
- Limited companies are often perceived as more professional.
- Limited companies are taxed at 19%. There are plans to further reduce this to 17% by the tax year 20/21. After which, it is possible for director shareholders to plan their personal tax in advance.
- It can be more flexible with claiming expenditure incurred by directors during the course of business.
- It’s important for individuals to seek expert advice before incorporating. There are many options. We can help the best one for you.
Contact us today to find out how we can help.