When to incorporate your sole trader business

A limited company is different from a sole trader or being in a partnership. You should carefully consider if incorporation is the best option for you. Consulting your accountant should provide you with clarity and ability to make the right decision. For further details on pros and cons of running your business as a limited company, check out these factors. 

This may be the perfect time to weigh up your options and make an informed decision that will shape the future of your business. Read on for some pointers on when to incorporate your business and whether you should make the leap. 

Sole trade vs. incorporation 

Operating as a sole trader offers simplicity but can also come with limitations. A sole trader may face finance restrictions and find larger customers will not work with unincorporated businesses. 

Operating as a limited company may provide greater access to investment and can shelter you from liability. The company is its own entity, so usually you are not personally responsible for its debts or legal issues. Setting up a limited company involves set up costs and you will need to comply with regular filing requirements. These include filing your annual accounts with Companies House and submitting a Confirmation Statement. 

It may be advantageous to incorporate your sole trader business for tax efficiency. Sole traders pay income tax and companies pay corporation tax, so this creates a difference in tax liability. Your accountant will be able to prepare some calculations which can help you decide when to incoporate your business. 

Should I incorporate my business straight away? 

As a business, it is important to undertake strategic tax planning. Understanding your business goals can help you to make the right decisions and keep you focused. Planning ahead should mean that you can prepare for when the right time might be to incorporate your business. 

Preparing forecasts will let you anticipate projected turnover and profits. Use financial predictions to plan with your accountant and decide when to incorporate your business effectively. 

Changing tax rates may move the goalposts so it is important to review your goals and where your financial results are frequently. Your business plan may include reaching profits of a certain amount in the five years' time. Through this plan you may expect to benefit from incorporation at that time. Tax rates for income, national insurance, or corporation tax may change, so it is wise to incorporate earlier than planned. 

Should I incorporate my business at the start of the tax year? 

In terms of practicalities, incorporating your business at the start of the tax year may make sense. Incorporating your company at the start of the tax year can create a clear line between the two businesses. However, it is unlikely that the split will be clear cut and there will be a lot of crossover.  

Furthermore, you may still be required to prepare a personal tax return so no matter when you incorporate you may always have two tax returns to submit. 

Steps to incorporate your business 

If you decide to incorporate, there are several steps you will need to take, including: 

1. Choosing a company name 
2. Appointing directors and shareholders 
3. Registering with Companies House 
4. Notifying HMRC (HM Revenue & Customs) and other relevant authorities 
5. Setting up a business bank account 

After incorporating, you will need to adapt to new roles and responsibilities as a director and shareholder. You will also need to develop long-term strategies for growing and managing your business in its new form. 

Incorporation causes change, and it is important to prepare for the challenges and opportunities that accompany it. This may include: 

• adapting to new reporting and compliance requirements 
• managing relationships with shareholders and investors 
• navigating new tax and financial landscapes 

Deciding when to incorporate your sole trade business is a significant decision that requires careful consideration. By weighing the financial, legal, and operational implications, and seeking professional advice, you can make an informed choice. That choice will position your business for success and growth in the years ahead. 

What year end will my company have? 

The date you incorporate your business primarily dictates a company's year-end. Incorporating your business on the 1st April will mean your company automatically has a year-end of 30th April. Thereafter, it is possible for you to change your company’s year-end to a date that you would like it to be. 

You can shorten your company’s financial year as many times as you like. You can lengthen your company’s financial year to a maximum of 18 months once every five years. If your company is in administration, you can extend your financial year by more than 18 months and more frequently. 

You must inform both Companies House and HMRC if you change your company's year-end. This includes updating the date of your accounting period with HMRC. 

What filing requirements will my company have? 

As a limited company, your filing requirements will include: 

• company accounts 
• company tax return 
• confirmation statement 

The deadline for filing the accounts and tax return with Companies House and HMRC depends on the company's year-end. Changing the company's year-end may bring forward the deadlines that you need to be aware of. 

When will my company tax be due? 

Corporation tax is due nine months and one day after the end of the accounting period. A company with a 31st March year end will have a corporation tax deadline of 1st January. Do note that the deadline for paying corporation tax is before the deadline for submitting a company tax return! 

If you are an employer, your PAYE/NI must reach HMRC by the 22nd of each month. If you are VAT registered, you must pay any VAT liability one month and seven days after the VAT period. For example, if your VAT return period is 1st January to 31st March then the deadline will be 7th May. 

How can we help 

Incorporating your business is a complex process with significant legal and financial implications. Get advice from professional accountants and solicitors to make the best decisions for your business. 

TaxAssist Accountants are experts in business and can support you with your limited company or unincorporated business. Arrange a free face to face meeting with our experts today. Call 01306 735222 or use our online contact form. 

FAQs 

How does incorporation affect my day-to-day business operations?

When you incorporate your business, your daily work routine will remain the same. However, you will have additional responsibilities as a director and owner. You will need to maintain proper records, file annual accounts, and ensure that you are meeting your legal obligations. 

Can I switch back to a sole trade if incorporation does not suit my business? 

You can dissolve an incorporated business and return to sole trader status, but it can be complex and costly. You should carefully consider your decision before incorporating. 

How long does the process of incorporation typically take? 

The process of incorporation can be quick and simple. It may take longer where there are complexities and you seek additional advice or approvals. 

Does the basis period reform affect companies? 

The basis period reform does not affect companies. Only certain businesses, like sole traders and partners in a partnership, are impacted by the basis period reform. 

Do companies have to comply with Making Tax Digital? 

Making Tax Digital for VAT is now active. HMRC will implement Making Tax Digital for Income Tax Self-Assessment for most unincorporated businesses by 2026. The Government is planning to introduce Making Tax Digital for Corporation Tax, but they have not set any dates yet. 

Date published 8 Apr 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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