At what profit threshold do you think it is beneficial to incorporate your business?

When setting up a business, one of the first decisions you’ll face is whether to operate as a sole trader or establish a limited company. 

To put it simply, as a sole trader, you are the business—you’re personally responsible for its success or failure. On the other hand, a limited company is a separate legal entity, distinct from its owners, which offers certain advantages and drawbacks that go beyond just the financials. 

One key benefit of setting up a limited company is the protection it offers in terms of liability. As a director, your personal liability is limited to the company’s assets, which means if the business encounters financial difficulties, your personal assets are generally safe—provided you’ve acted in the company’s best interests. 

As a sole trader, however, you won’t have to worry about the complexities of filing company accounts, corporation tax returns, or confirmation statements. You’ll also avoid the added expense of an accountant for company-related matters. 

But there are other factors to weigh. For example, some argue that operating as a limited company can give your business a more professional appearance. Moreover, a limited company allows you to manage how and when profits are taken, which can be more tax efficient. By extracting profits as dividends rather than salary, you may be able to reduce your personal tax liability, depending on your situation. 

So, what’s the right choice for you? Does it make sense to incorporate your business if profits are £20,000, £60,000, or £100,000? 

Before diving into the answer for your business personally, let’s clarify a few assumptions: 

1. For the company option, it’s assumed that the director will take the first £9,100 as a salary, equal to the NICs secondary threshold, with the remaining profits taken as dividends. 

2. The tax rates used are for the 2024/25 tax year. 

3. Remember to consider an cost for accountancy fee for a limited company, compared to a sole trader, is assumed. While this can vary, it’s a common estimate and should be taken into account. (I’d suggest a fee of an estimate of £800)

The answer may surprise you, with the recent changes in corporation tax, there isn’t a definitive answer.

In the end, the best choice depends on your business’s specific circumstances and goals.