Becoming a Limited Company.
Limited Company – So, you’ve started your business, or you have a great business idea. A question that springs to many lips is – should I form a limited company?
Well not surprisingly, there’s no simple answer to that question – or the simple answer is – it depends!
There are lots of pros and cons to operating as a limited company, and the weight that attaches to each is down to the business concerned. lets look at the main pros and cons as that should help.
- Limited liability – this is the obvious one, and for some businesses is enough on its own. A limited Company is a separate legal entity, and that means that assets of yours are nothing to do with the company, and liabilities of the company are nothing to do with you – which can be very handy. There are other factors to consider here though, as a Director has certain duties and responsibilities.
- Tax savings – this is another reason that is popular. Limited Companies and Sole Traders (or partnerships) are taxed differently, and with some appropriate planning there are tax savings to be made. Generally speaking the higher the profit, the more potential tax savings, and there are lots of ways to make the most of the savings, not just taking dividends instead of salary.
Now the Cons
- More reporting – a limited company has to prepare and file Financial Statements that comply with the Companies Act. It also has a number of other requirements, such as filing an Annual Return, maintaining statutory books, preparing and filing a Corporation tax return and computation, operating a payroll and PAYE, all of which add up to more work.
- More costs – reporting requirements and making the most of tax savings mean you need an accountant, even if you can manage to do your own tax return as a sole trader. The Accountant‘s workload is increased which does mean higher costs. If you’re already trading you’ll need new stationery, an updated website etc.
- Disruption – If you’re switching from a sole trader business you’ll have to notify all the people you do business with – the bank, your customers, your suppliers, HMRC. How will they react? As mentioned under costs – they’ll be new stationery to organise and people to update.
Should you form a Limited Company? First decide what the pros and cons mean to you, and how much impact they’ll have. Check what other pros and cons there may be for you and your business. Only you can decide how much weight each factor holds. You’ll probably need professional help to fully assess the tax implications, but the tax savings should clearly outweigh any extra costs. Make sure you fully understand what your obligations and responsibilities are – more information is available eg. Companies House .
By Tracey Kelk