Why would I change from sole trader to limited company?

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I’ve been advised by a business mentor at my university that I form a limited company for my business rather than operate as a sole trader. It was a rushed corridor conversation, and he didn’t actually get a chance to tell me why! Typical. So, is there any way you might be able to let me know why you think I (or anybody, really) would benefit from changing from a sole trader to a limited company? I simply want to be as informed as possible before I do something silly.

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The main reasons that someone would switch from sole trader to limited company are limited personal responsibility for business debts (i.e. limited liability), boosting their professional image, and potential tax savings.

‘Limited liability’ means that you can only be held personally liable for business debts up to the amount you invest in shares or guarantee to the company. Sole traders do not have this security - their personally liability for business debts is limitless, which is a huge risk to take in certain industries and with high-value contracts.

Setting up a limited company can also dramatically improve your professional persona because many people look upon limited companies as established corporations that are credible and reliable, regardless of how big or small they actually are. This is mainly due to the strict reporting and public disclosure requirements imposed upon companies - incorporated business are more closely monitored by HMRC as well as Companies House, so this increased dedication, scrutiny and transparency generates much greater confidence from third parties.

Finally, money… Depending on the amount of taxable income your business generates, a limited company may be a much better structure for you in terms of managing your personal income more tax-efficiently. This is due to the fact that companies pay 20% Corporation Tax instead of 20-45% Income Tax, so you could pay a lot less tax as a director and shareholder by taking a small salary and high dividends. Whilst this may not benefit someone with a very low income, it can be increasingly advantageous when taxable business income exceeds around £20,000 per annum.

a year ago
 

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