Updated: Feb 25, 2020
There is no set rule or amount of turnover that determines when the switch to a Limited Company status should be made – and indeed no requirement that a business becomes a Limited Company in structure. It's a matter of choice for the business owner.
However, there are a number of reasons why a business owner may wish to move to a Limited Company structure:
Perhaps the most important difference is that a Limited Company is a separate legal entity to you, meaning that your liability is limited to the investment you make in the company. Your personal assets are not at risk from creditors/employees. This is not the case when you are self employed (a sole trader) where all personal assets are at risk.
As a sole trader all income (less any allowable expenses) is taxed at your highest marginal rate and includes National Insurance payments. A Limited Company structure allows you to be an owner, director and employee of the company, which in turn leads to tax savings over sole trader status. In a Limited Company you are paid a salary. This allows you to minimise tax and National Insurance payments. In addition, you will receive a dividend as a shareholder (owner) which can give additional tax savings.
A Limited Company can give your business a better standing, particularly with larger companies that may want to deal with a business that is subject to greater regulation and transparency. This is also true where a supplier allows you time to pay your invoices (granting your business credit) which can be important for cash flow, especially when your business is growing quickly.
Other benefits include:
No need to make payments of tax and NI on account
You can seek investment in the company (in return for granting a share of the company)
It is easier to sell the entire company once there is a strong client base/business established
Statutory regulation – Limited Companies need to follow more regulation than the self employed (sole traders)
Costs – this leads to additional costs that need weighing against the benefits described above
Visibility – your accounts and directors names are public information