When to change from Sole Trader to Limited Company

Are you thinking about transferring your business into a company? For many business owners, this is the only way they can grow, expand into new markets, and it can be tax-efficient to change into a company.

There are many benefits to changing from a Sole Trader to a Limited Company, but first and foremost, the decision should be based on sound commercial reasons, not short-term tax saving. You should also be aware of the costs involved with setting up a Limited Company when making your decision.

This is what you should ask yourself to decide if it’s time to change.

Should I set up as company?

  • How much is your business going to grow?

    Since you’re already in business, you probably have expectations of how your business will grow over the next 12 months. If your business is expanding and growing rapidly, it makes sense to change to a Limited Company so you can benefit from profits being taxed at the rate of Corporation Tax (12.5%).

  • Do you require the protection of limited liability?

    When you set up a company, you are setting up a separate legal entity to its directors and shareholders. This means that in most circumstances, you won’t be personally liable for any of the debts of the business. This is called limited liability and one of the benefits of setting up a Limited Company in Ireland.

  • Are you making more money in your business than you need as a salary?

    This seems like a strange thing to think about – how can you make too much money? But there are tax implications depending on how much you earn. As a company, there are more ways to extract money than as a Sole Trader, such as salary, dividends, and contributing to a pension.

How to transfer from Sole Trader to Limited Company?


Cease operating as a Sole Trader

In general, you start closing down Sole Trader business once your new Limited Company is set up and the incorporation date is usually the cessation date for your sole trade. However, every situation can be different so it's important that you speak to an accountant.

Determine the value of your business

Sole Trader accounts need to be prepared to determine the value of your business that will be transferred to the new company upon incorporation (if any). If you transfer any assets, it may have Capital Gains Tax (CGT) implications.

Prepare Income Tax return

The cessation date of your Sole Trader business will be notified to Revenue when you file your next income tax return. It’s ok if your company is set up before filing your return as long as the valuations are calculated correctly. Contact us if you need help filing your Income Tax return.
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How to record transactions when changing from Sole Trader to Limited Company?

There are two scenarios and they depend on when the Sole Trader stopped doing business and the Limited Company started.

1. Sole Trader ceases before the company is incorporated

Once you have stopped the Sole Trader business, you can start to record all your transactions in the company account. There are no Sole Trader transactions to enter.

2. Sole Trader and Limited Company crossover

For example, a crossover in purchases – this could happen if you don’t have a separate bank account for your company yet. If a purchase is made from the Sole Trader account but is meant for the Limited Company. In this case, it can be entered as normal in the Sole Trader account.

However, this purchase is also entered into the company account as being owed to the Sole Trader. In the company account, the purchase is entered as a purchase from a supplier. In other words, your Sole Trader business is selling the supply to your new company.

Please note that VAT cannot be claimed in the Sole Trader business for this purchase because the purchase was not for that business.

Another example is a crossover in sales. This could happen if you don’t update your clients on your new bank account details. If your client paid money into your Sole Trader bank account instead of your Limited Company bank account, the money will need to be transferred to your company bank account.

The debtor will remain in the company until the money is in the company’s bank account. The sales receipt in the Sole Trader account should show as being owed to your new company.

Check your bank accounts and online accounting software

Your new company needs to have a separate business bank account in its own name. If you have a business account for your Sole Trader business, you’ll need to close this account and transfer the assets to your company account.

Sole Traders and Limited Companies are separate entities and have their own reporting requirements. So, it’s important to keep your online accounting software segregated and ensure any transactions are reflected accurately in both entities.

If you didn’t use online accounting software as a Sole Trader, now is the perfect time to take your accounts online. Taking your accounts online will make your accounting obligations easier to manage and your accountant will appreciate your invoices, bank statements, and receipts being on the cloud.

Tax implications of transferring a business to Limited Company

As mentioned above, determining the value of your assets is required when changing from Sole Trader to a Limited Company in Ireland.

When you’re calculating the value, the most common potential tax implication is Capital Gains Tax (CGT) at 33%.

As a Sole Trader, you own all the assets of the business. Therefore, you are deemed to have sold them when transferring those assets to your new company.

When transferring assets, the market value of the assets transferred, less their original cost, will be subject to CGT at 33%.

Do you have to transfer your assets?

When incorporating your business into a company, there is no requirement to transfer capital assets. However, you can decide to transfer all the assets and liabilities of your business or perhaps just some. Remember, you will only be deemed to have sold assets to the company if you choose to transfer them.

Each circumstance will have different tax implications and therefore it is difficult to give standard advice on this step.

Seek professional advice from an accountant about your scenario. We’re always happy to help. If you would like to talk to us about our accounting services, get in touch with our Client Services Team now.

What next?

If you’re ready to start changing from Sole Trader to Limited Company in Ireland, talk to our Client Services Team about how we can help you transfer your business.

We offer a wide range of Company Secretarial and Accountancy Services so we can take care of the transfer and make sure it’s a smooth and easy process.

Call us on +353 (0)1 905 9364 or email hello@accountantonline.ie.