So, you’ve taken the plunge and decided you’re going it alone, and then you realise that you’ve made the first of many decisions.
You’re in the pub, and let’s call him Dave, says ‘Ooh I don’t pay any tax and I’m set up as a Limited Company, that’s the best route to go”. Then you bump into Mary in the shops and she says “you definitely want to be set up as a sole trader, so much less admin”.
And now you’re sitting thinking what should I do?
So, what are the advantages of being a LIMITED Company?
- For many, the attraction in using a Limited company will be the perceived tax savings. Companies pay corporation tax at the rate of 19%, compare this with sole traders or partners who pay income tax at up to 45% and Class 4 NIC at up to 9%. But remember, you still have to extract the money from the Company.
- There are a number of reliefs which are only available to companies such as Research and Development, which if you’re entitled to claim gives you an extra 130% deduction
- Using a company means that an individual’s risk is limited to the amount invested in the company, giving business owners peace of mind. Compare this with sole traders whose liability is unlimited.
- Flexibility; potential to use a limited company to involve family members and others in the ownership of the business as shares. Using a company can give some flexibility as to when amounts are taxed too.
- Sometimes though it all comes down to perception, or even customer requirements
The advantages of being a sole trader are:
- A single layer of taxation, you’re simply taxed on profits they are earned.
- Less paperwork, although you need to report your income and expenses from the business in your Self Assessment Tax Return. A Limited company on the other hand must prepare and file accounts to Companies House and submit a Corporation Tax Return to HMRC. A business owner who uses a Limited company may spend more time on compliance activities and/or incur higher accountancy fees.
- A director of a Limited company takes on certain responsibilities, for example, ensuring that the company keeps appropriate accounting records.
- Losses generated by a company are locked within that company, they cannot be offset against the income of the business owner. See our recent case study here.
Different structures will work for different people and it’s definitely no one size fits all!
Things to consider are: are you expecting to make a loss in the initial year or years, would you benefit from limiting liability, would you be entitled to R&D tax relief and what fits with the direction I want to go?
If you want to talk about it in more detail, we’d be happy to support and guide you through the best structure for you. Say hello to Bev or Ian at firstname.lastname@example.org or give us a buzz on 01332 460814.