What happens when a sole trader forms a limited company?

The tax issues concerning incorporation and disincorporation

Incorporation and disincorporation

It is possible for a business to be commenced as a sole tradership or partnership and for that business to be transferred to a company at a later stage. That should be considered where losses are foreseen in the early stages. Any losses not relieved against your other income, or against trading profits of a subsequent year, can be carried forward and set off against income from the company to which the business is transferred, such as remuneration or dividends.

Gains arising on the transfer of assets to the company can be rolled over, and there need not be any balancing charges under the capital allowances legislation.

On the other hand, there are no special reliefs on disincorporation. Therefore, there can be tax penalties if a business which was set up in a company is transferred out of the company to individuals.


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