Sole Trader to Limited Company

Yep, I was a sole trader from April 2014 and incorporated my LTD in October 2015.

My partner is due to create his company soon, so I've been going through the steps with him.

Having a ltd company is a fair bit more work than being a sole trader in terms of paperwork, but if your accountant is suggesting it's more beneficial then hopefully the extra paperwork will make it worth it.

To start, you obviously need to incorporate your company (with a unique name) through Companies House. Your accountant can do this for you but it's cheaper to do yourself (I think about £15) and you can do it online.

Then, you need to arrange a business bank account. You can probably start the process of applying for this but you won't be able to provide all the paperwork to open the account until you've received your certificate, so it's good to get started. Also you'll be able to see yourself on Companies House website search much faster than you receive your company paperwork in the post so you can use the certificate published on the website instead of the paper copy.

You need to have some form of accountancy software. I use Xero as it was recommended by my accountant. It's pretty simple. You can manage it yourself and give your accountant special access too so they can change things on your behalf.

From as soon as the company is incorporated and the bank account exists, you'll want to start taking income to the new account instead of your current account. Money in your LTD company account is not anything to do with you and should be kept entirely separate from your personal finances.

If you are married, it would make sense for you both to be employees of the company and both directors too. You can pay yourself a small monthly salary each, enough to not go over the personal tax allowance of £11,000. Then the leftover cash that comes into the business can be paid out as dividends. It is recommended not to pay a monthly dividend, and never for the same amount. Try to do it 3-4 times a year. You will need to pay 7.5% tax on any dividends you receive. So you will both need to put in a yearly personal tax return still.

Retain money in the business account to pay for any expenses (equipment, fees, accountancy costs etc) and also retain 20% as this is used to pay the corporation tax bill. After that, the money left in the account can be used to withdraw dividends.

There are lots of other things to consider, such as VAT, but hopefully that's a good starting point.

I went with Santander purely because they didn't require me to have a formal meeting and I needed an account quickly. But that's probably not the best answer.

I'd research the costs associated with cashing cheques and such. Some banks charge businesses certain amounts.

The crossover period where you're still getting things set up is the most difficult. I would incorporate your company, say on the 25th April, and from that day forward any money received as part of work I would stash in a separate personal account while you wait for your business account to be set up. Once the business account is set up pay the cash in and mark it on your books as being sent to personal account by accident.

Also with regards to expenses, you want to buy things through your company not your personal funds. If you buy through personal funds, then you can submit them as expenses through Xero to your company who then pay them back to you. This isn't taxed as it's not income, just reimbursement for what you've spent. Keep all receipts. Ideally you want to buy any business related expenses directly from your business account, not having any involvement with your personal finances. So I have my business account linked to Amazon for purchasing business materials.

In regards to expenses remember that anything you claim must be wholly and exclusively for use of the company. If you buy a company car, you can't use it for personal driving. It's the companies car, not yours. If your business goes under the car is part of the business and not owned by you...

The general way you handle ltd companies is to pay yourself a small salary, reduce your profits with expenses, and then pay dividends only on what's left after tax.

You can pay yourself a pension, and match it, if you're employed. So that £11k a year your company pays each of you could be swallowed up entirely by pension contributions if you like.

greensalad wrote: »

....You need to have some form of accountancy software. .

You don't need to have "some form of accountancy software".

You must keep accounting records, but you can do so on paper, if you want.

greensalad wrote: »

If you are married, it would make sense for you both to be employees of the company and both directors too.

Hi

I am not sure that this advise is correct - my accountant has always advised me against employing my wife - it really depends on what that person is going to do - I would double check with your accountant.

greensalad wrote: »

If you are married, it would make sense for you both to be employees of the company and both directors too. You can pay yourself a small monthly salary each, enough to not go over the personal tax allowance of £11,000. Then the leftover cash that comes into the business can be paid out as dividends.

As to dividends - well yes split the company - but you need to decide how much by - 50/50 might be fine - but you might want to do something different - again speak to your accountant.

greensalad wrote: »

It is recommended not to pay a monthly dividend, and never for the same amount. Try to do it 3-4 times a year. You will need to pay 7.5% tax on any dividends you receive. So you will both need to put in a yearly personal tax return still.

Your comment about dividends is not correct or at least does not tell the whole story - below is a copy from my accountant:

Dividend Tax Changes

In the new tax year the way in which income tax is calculated on dividends will change. The changes are summarised below:

· the existing 10% tax credit will be scrapped and the (sometimes confusing) concept of net and gross dividends will disappear with this;

· a £5,000 tax free dividend allowance will be introduced and dividends declared in excess of this will be taxed at the following rates:

o dividends in the basic rate will be subject to income tax at a rate of 7.5% (previously an effective rate of 0%);

o dividends in the higher rate will be subject to income tax at a rate of 32.5% (previously an effective rate of 25%); and

o dividends in the additional rate will be subject to income tax at 38.1% (previously an effective rate of 30.6%).

Thanks Mark