Many small businesses and self-employed people start out as sole traders because it’s the easiest legal structure to set up. Especially when you’re keen to get going with your new venture.
But despite more admin, becoming a limited company can bring increased tax-efficiency in your plumbing business. As well as limited liability; greater borrowing power; improved reputation; and credibility among clients and customers.
If you are still in the deciding phase which business structure is right for you. Please read through our article on” Sole Trader or Limited Company which best suits your plumbing business (link to follow)”.
When is the right time to form a limited company?
In time, the profits of a successful small enterprise will start to flow in. At this point, you may want to consider how becoming incorporated could lower your tax bill.
The common consensus is that when your earnings remain low, it may be best to remain as a sole trader. Unless you need other benefits such as limited liability. As a sole trader, your tax and accounting responsibilities will be relatively simple.
When your earnings start to pick up, it becomes more economical to move to a limited company format. Save yourself money on tax.
Another key benefit of changing to limited company is what it could do to boost your business’s image in the eyes of your clients. Incorporation may give you more of a professional edge, credibility, and improved reputation.
Key steps to take or keep in mind if you’re changing from sole trader to limited company:
You need to set up a separate business bank account
One of the benefits of running a limited company is that you won’t be personally responsible if your company makes any losses or has a claim made against it. Which means all of your business finances must be in the business name.
For this reason, whilst it’s not actually a legal requirement. You need to set up a separate business bank account in the name of your limited company. It’s highly recommended you don’t use the personal bank account used when you were a sole trader for your company’s finances.
As a limited company, you’re taxed personally on the money you take from the business in salary and dividends. As a sole trader, all of your profit is taxable to you personally.
Decide whether you’ll be the sole director or whether you want to bring in others
Usually if you’re setting up a limited company for your business then you’ll be a director. It’s not too difficult, but there are things you’ll need to be aware of as a director such as taxes to pay as a limited plumbing business. But what about if you’re working with a business partner, or you want your spouse or partner to be a director and shareholder?
These can be difficult decisions with potentially costly implications if you get them wrong, so we’d recommend getting some professional advice. We offer a free consultation where our accountants and advisors can talk you through your options, so why not give us a call on +44 01234 712840.
Tell HMRC your legal structure has changed
You need to notify HMRC that you aren’t working as a sole trader anymore. This is very important because changing legal structure affects the amount of tax you need to pay
Choose a name for your limited company
When forming a limited company you need to pick a company name to register your business with. The first hurdle will be choosing the perfect name for your brand, and then, before you can register the name, you will need to check the name with Companies House. There are a number of restrictions to bear in mind:
- Companies House do not allow duplicate names on the register so the name must be unique
- All company names must feature the word ‘limited’ or ‘ltd’ at the end.
- The name must not be too similar to an existing company name.
Transferring your assets to your limited company
If you bought any business assets when you were working as a sole trader, you’ll be able to transfer them to your limited company when you incorporate. However, there might be tax implications of doing this; therefore it is vital you speak with an accountant for a professional advice
You will need to establish the current market value for the assets. This can be done by checking the second-hand value of the assets on auction sites.
Once you have established the value of the asset, you will need to create an invoice from the company to you and your partner for this value in order to “sell” the assets to the company. The company does not need to pay for the assets immediately. The value can be treated as capital introduced and can be recorded as a loan from a director to be repaid over a period of time or paid in full at a point in the future.
The assets qualify for Annual Investment Allowance (AIA) up to a £1Million limit from 1 January 2019 to 31 December 2020. The assets can only be claimed in the period of purchase and are deducted from the company’s profits before tax. Therefore there will be a reduction in corporation tax. Note any depreciation charged on the assets will need to be added back to the taxable profits as this a non-allowable expense for corporation tax purposes.
If the assets are sold after claiming AIA the company may need to pay tax.
Income is processed differently
Your personal income from your limited company will be paid to you in a combination of salary (which is an allowable business expense) and dividends. Dividends are taken from the profits of your company after paying corporation tax. And are paid to you because you’re a director and shareholder in the company.
We have a separate article on this, paying yourself as a director of a limited company.
Since your tax will be calculated differently, you’ll need to keep your personal and business financial affairs (including bank accounts) completely separate.
Corporation tax
When you’re self-employed (as a sole trader) you pay tax on your income via your Self Assessment—depending on your earnings, you may pay Income Tax and National Insurance of up to 47% combined.
When you’re a limited company, though, the main rate of corporation tax (in the 2019/20 tax year) is 19%, meaning your tax bill could be much smaller. Don’t forget you’ll pay personal tax on any salary or dividends taken from your limited company via your Self Assessment.
Business expenses are treated differently
You can claim tax relief on a variety of business-related expenses as a limited company that you couldn’t as a sole trader. Our Business Expenses guide will help you understand what you can and can’t claim for.
Get an ideal Accountancy application to support your limited company
The ideal model to provide the accountancy support your limited company needs is an all-in-one accounting solution that enables you to manage everything online with handy apps, while having access to expert accountants as and when you need them. At Libabun Accountancy, we use Xero Accounting Application– which is the best accounting software for growing companies; along with ReceiptBank app to capture all your bills and receipts. Through these applications, we keep your accounts up to date on a monthly basis so you can have a clear view of the monthly performance of your business.
Another area to consider is the costs your accountant will charge you. These vary greatly. And whilst some accountants promise low rates, it’s the hidden costs and added extras that can soon stack up. For example, if you phone your accountant for advice, will they charge you for contacting them? Are there any extra charges for essential tasks such submitting your monthly payroll to HMRC PAYE or your quarterly VAT to HMRC? Do they charge you for basic personal and company tax advice?
Because of the wide range of pricing models in the industry, many small business owners are put off from forming their own limited company. Why form a limited company if there’s no guarantee of getting the level of service you need at a cost you can afford? It’s a real shame if people are missing out on the benefits of running their own limited company because they cannot find the right accountancy solution.
Get an accountant!
Well, we would say this, wouldn’t we!
Getting an accountant is a great way to keep on top of your finances. They’ll remind you of important tax deadlines and payments due. Show you ways of keeping your accounts in excellent shape. And advise you on allowable expenses and how to report them so you’re as tax efficient as possible.
They can help you with things like estimating how much tax and NI you’ll need to pay every six months, or quarterly for VAT. They’ll also help to ensure you’re not forgetting any payment on account, which catches many people out every year.
How Libabun Accountancy can help your business?
Our accounting team understands that you want to spend as little time as possible updating your accounts so that you can focus on fulfilling your contracts, winning new business and enjoying your free time. We will help you on your journey with accountancy support and advice to assist you with growing your business.
LibAbun Accountancy has been working with several of businesses of all shapes and sizes across the UK. We have gone to great lengths to listen to the needs of businesses, to invest in technology and to train our client accounting team to deliver a high level of service to new and old clients alike.
Our focus on people, advice and technology has created a leading online accounting experience. We have embraced technology, combining online accounting software with help and advice delivered by a friendly accounting team. We are confident that you will find managing your accounts quicker, easier and more convenient.
Please click here to get a quote.
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