Incorporating your company is a big, exciting step, but there’s a bit of a hill to climb first before you can enjoy the views. If you already run a business as a sole trader then a vital step in this process is planning what to do with your assets, and whether you want to transfer them over to your limited company. We’ll discuss how it’s done, as well as the tax implications that may come with it.

What is the difference between a sole trader and a limited company?

Truthfully, there are lots of differences. For instance, if you’re a sole trader you are the business and HMRC sees you as the same legal entity. This means you can keep all your profits after tax, use your own personal bank account rather than a separate business account if you wish, and operate under your own name if you choose to.

Completing tax returns is much simpler too, but like anything there are considerations – a big one being personal liability. Basically, as a sole trader you’re responsible for whatever goes on legally and financially within your business.

It’s different for a limited company, because they are seen as separate entities to their owners. If you own a limited company you’ll have limited liability, so your business’ debts aren’t your personal debts.

These are really important points to remember when we start talking about transferring assets to a limit company.

Does every sole trader incorporate their business?

No. It’s completely up to you whether you want to incorporate your business, and you can remain as a sole trader if you prefer to.

There are definitely things to think about first. For example, sole traders who’ve seen growth may find it to be more tax efficient depending on their circumstances, but you’ll also have more tax reporting obligations and you’ll no longer be able to take money out of your business as and when you please.
 

Is incorporating my business good for my assets?

Forming a limited company can impact both your personal and your business assets. For example, when you incorporate a business it becomes a separate legal entity to you – meaning your company debts aren’t your personal debts. So, things like your car and even your home are now protected if your company faces financial difficulties.

If you wanted to transfer your business assets over to your limited company, this could be beneficial as you’ll be able to claim Capital Allowances – which is a form of tax relief for businesses. It often means you can deduct all or part of your asset from your profits before you pay tax.

Business assets are things you own or use that create value within your company, and can be anything from business premises, equipment, intellectual property, or vehicles you use for business purposes.

You can also transfer personal assets to your limited company if you wish. For example, any property you own – but it’s advisable to speak to your accountant or solicitor first to ensure this is the best decision for you.

Identifying the assets you need to transfer

Before making any transfer moves, like football, it requires some planning. The first thing you need to do is identify all the assets you’d like to move over, such as:

• Business premises
• Computers, machinery, any type of equipment
• Trademarks, copyrights, etc

Once you’ve identified these things, you’ll be able to start the transfer process. It’s important to discuss the list with your accountant before moving forward, just to make sure transferring them to your limited company is the right thing to do. Remember that once they’ve been transferred, you’re no longer the owner – the limited company is.

How do I transfer my assets over to my limited company?

There are two ways you can transfer an asset to your limited company; either by a sale to the company, or by placing a credit on your director’s loan account (DLA).

Transferring assets to a company via a sale

A ‘sale’ is where you’ll sell your asset to your limited company at its market value. By market value, we mean the price it’d sell for at present in the marketplace, so you’ll need to compare the price of similar items that have been sold on the market recently. The company will then pay you, and this will be reflected in your accounts.

This option might mean that you, as an individual, need to pay Capital Gains Tax on the profit you make (the difference between what it cost you to acquire the asset, and the amount the company paid you for it). It’s why it’s so important to make sure you charge your company the correct price! Selling it for less than the actual value might be seen as an attempt to avoid Capital Gains.

Placing a credit on your Director’s Loan Account

If you’ve recently incorporated your limited company, it might not yet have funds available to purchase your assets via a sale.

Instead, you can place a ‘credit’ on your Directors Loan Account (DLA), which basically means that the company owes you money for the assets it now owns. The credit will stay on your DLA until your company can afford to pay you back. A DLA can also be used to record personal money you withdraw from the business that isn’t a salary, dividend, or expense repayment.

Do I value my assets by myself?

You don’t have to. You may have expensive assets or complex intellectual property that are just too tricky to valuate on your own. In this instance, you can hire a professional to value your assets for you.

Do I need to change my client contracts when incorporating my company?

Your existing contracts won’t automatically change, but it is good practice to notify all parties of your new legal business structure, and make amends to your contract where you need to. You’ll need to update other documents though, such as your invoices, as well as your website or other marketing materials!

Things you need to consider

There might be other things you need to think about before registering a new limited company. For instance, if you have employees, you’ll need to issue new employment contracts showing your limited company as the employer, and update your PAYE records accordingly. You may also need to review and update insurance policies.

A big one is understanding your new tax obligations. You’ll now need to send Company Tax Returns and pay Corporation Tax – but you still may need to submit a Self Assessment too. For example, if you pay yourself dividends, or have untaxed income outside of your limited company.

It’s important to speak to an accountant about this change, as they’ll be able to guide you through it step-by-step.

 
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