When you make the transition from sole trader to a limited company there are some particular areas of change to consider.
Set up a separate bank account.
After you’ve incorporated it’s essential that you set up a separate business bank account from which to conduct your business transactions – you cannot continue to use your personal account as you did when sole trading.
This is due to a limited company existing as a legal entity unto itself. Its finances have to be in the business’ name and not your own – you are the director, not the company itself.
Income is processed differently
Another reason that it’s a necessity to keep your personal and business finances separate is due to the way in which you’ll now receive an income from your business – which is different for tax purposes.
Income from your limited company can be obtained in two ways. In the form of salary, which is an allowable business expense paid to employees, and in the form of dividends, which is taken from your business’ profits and paid to shareholders.
For more information on splitting salary and dividends click here.
Allowable business expenses are treated differently
The criteria for claiming business expenses is different and you can now receive tax relief on a host of expenses that you would not when sole trading.
Locate our Expenses Guide in the top right of the Help Centre home page for a comprehensive review of the expenses now available to you.
Transferring assets to your limited company
You can sell any asset to your company and will receive Corporation Tax relief from it. You will need to know the written down tax value of the asset, which can be located on your sole trading tax return.
Providing your Annual Investment Allowance hasn’t been used on the assets there will be a benefit to bringing them on board.
There are other factors to include depending on the cost of the asset but there are potential savings to be made - contact your Client Manager for more details.
As a limited company your personal services are now subject to IR35 regulation which determines if you are providing ‘self-employed’ contracting services, or employed by your client.
For more information on IR35 and if you are operating within the legislation click here.
What to tell HMRC
You need to notify HMRC that you are no longer a sole trader and consequently don’t need to be paying Class 2 National Insurance Contributions. Contact them by ringing 0845 915 4515.