A lot of people ask if they should incorporate – (start to trade through a ‘limited company’ rather than a sole trade or partnership).

I can’t stress enough the importance and value you will have from a proper consultation with a qualified accountant or tax specialist to make sure everything is considered.

The conversations I have usually start with; “my friend told me to go Limited because I will save tax”. Once upon a time this was true for almost everyone however, the Government has changed the tax system to try and even this out. But there are still ways to have a small tax efficient salary from the company, as well as carefully planning a share structure and extraction of profits.

If you plan on taking all the money the company makes and paying it to yourself then being a limited company does need more consideration depending on how much that amount is.

If you trade a sole trader or partnership the main things you must complete for compliance purposes are:

  • a self assessment tax return,
  • a partnership tax return and possibly
  • a set of accounts depending on the complexity or requirements of the individual (however the accounts are not governed by an external force – namely Companies House)

A limited company has to complete the following:

  • A set of accounts and submit them to Companies House within 9 months of the year end
  • Corporation tax return to HMRC with an iXbrl copy of the accounts
  • Confirmation statement
  • Self assessment for the directors / shareholder in most situations

Now the compliance is out of the way, the other benefits to going limited are the impression it gives to your customers. A lot of people trust a company, it makes them seem more credible, like they’ve been around longer and are more successful.

You do not have to register for VAT just because you are a limited company, this is all determined by the thresholds HMRC set (currently turnover of £85,000) but you can register anytime before that.

You also have more security over your personal assets. If you hit financial difficulty or get sued and the insurance does not cover the fault, a sole trader puts everything on the line, cars, houses gadgets etc, where as a limited company can only lose the assets that it owns.

The company pays its own tax – Corporation Tax, which is currently 19% of taxable profits. Then any money you take from the business you pay personal tax on but normally at a reduced rate via dividends. This is where an accountant and up to date information on your numbers is important. You can only take dividends if there is sufficient profit.

An important factor to highlight is;  just because the company has money in the bank does not mean there are enough profits to pay dividends. The most common reason that people fall into this trap is because they don’t count for the bills they need to pay such as wages, corporation tax and suppliers.

If the reasons given above (additional personal security and customers perception) aren’t enough for you to incorporate there’s always the end of the business to think about too.

When it comes to selling your business or devising an exit strategy, a limited company does have much more available to you. There’s the possibility of a management buy out, different share schemes, Entrepreneurs Relief of the sale of shares (only pay 10% in some situations).

Like every decision in life, you must weigh up the pros and cons and that’s what Robson Laidler can help you with. We can put your mind at ease and help you make the right decision for you and your business.