Incorporating a sole trader may happen for a number of reasons. For example you started a business on the side not sure whether it would work out and you wanted to reduce overhead costs initially. After a while the success is here and you want to make use of the lower taxes enjoyed by limited companies. Another reason could be that you had paid significant taxes prior to starting your business and because, as a sole trader you can offset trading losses against salaries in previous years, it makes sense to not incorporate right away if you know that your business will incur losses initially. Once the business starts to make a profit however, it makes sense to incorporate.
Incorporating means creating a company and having this new company of which you are the shareholder buy the existing unincorporated business from yourself. If the value of your business is say £100,000 you will make a capital gain of £100,000 and your company will have a goodwill of £100,000 on its balance sheet (assuming there are no fixed assets). Either the company pays you right away or most probably it credits the director's loan account allowing you to draw funds as they become available in the business. But why is it a good thing?
