I’m a sole trader, should I consider incorporating to a Limited Company?
One of the major benefits from incorporating your business into an Ltd company is limited liability. This means that providing the rules are followed individuals will not take on personal liability for contracts and creditors. It is common for banks, landlords and finance companies to still require personal guarantees whilst the newly formed Ltd Company establishes a credit history, however, these personal guarantees should be limited to an agreed sum. In reality you are still better off (particularly in this economic climate) providing a limited form of personal guarantee than having the unlimited liability associated with sole trader status.
When you are a sole trader all of the business income is treated as your income and taxed accordingly. However shareholders and directors of a limited company can receive income in different ways such as employee salary, shareholder dividends and the repayment of director loans. Coupled with the different tax system which applies to limited companies this may result in an immediate financial benefit to you.
In terms of cost it is not expensive to set up a new Ltd company as the registration fees are just £20 for the DIY route. It is recommended however, that you have a professionally prepared agreement regulating your Ltd company which will mean that the overall costs will be roughly the same.
If you are in a partnership currently you may want to think about creating a Limited Liability Partnership (LLP) which gives you some of the benefits of the partnership but with limited liability as described above.