Should I become a limited company?
A question faced by all new businesses is the question of incorporation. This by no means has a straightforward answer, with several important factors to consider.
It is important to properly understand and consider these factors, as once the initial decision is made it is very difficult to reverse it. In this article, I explore some of these factors.
What is a limited company?
A Limited Liability Company is an ‘incorporated’ business structure, meaning that to bring the company into existence it must first be formally registered with Companies House.
Once registered, the company is its own legal entity, meaning that the managers (directors) and owners (shareholders) are separate from the company.
Advantages of becoming a limited company
Incorporation protection (Limited Liability)
Trading via a limited company provides business owners with a level of personal protection that is not available to sole traders. It is the company that carries the risk, rather than the individuals personally, meaning you are not personally liable for any financial losses made by your business, offering you a safeguard should the unexpected happen. It is limited by definition and in practice – the total cost of the shares subscribed to is the limit of exposure by an individual unless personal guarantees are provided under different circumstances.
Incorporating a limited company also provides protection for the brand name because your company name is registered with Companies House. There are strict rules when it comes to company names to prevent others from using a name which is considered to be the ‘same as’ another existing company, LLP, or LP registered with Companies House.
The level of profits and your personal position can make trading through a limited company more efficient for tax purposes. It is worth noting that the saving (where there is one) could be impacted by the upcoming change in corporation tax rates and future government taxation policy. The advantage of incorporating is that profits are sheltered at corporate rates. If the level of business earnings, equates to the amount of money required by the proprietor to live, it may not be worthwhile incorporating. However, if the profits can be drawn over time and utilise shareholders’ personal allowances and marginal tax rates, this can improve tax efficiency.
Drawing on the tax saving discussed above, if a shareholder has family members that have spare capacity for earnings, they can be given individual share classes in order to receive their own level of dividends to draw profits from the business at a potentially reduced tax rate.
Depending on your trade, some customers may prefer (or in rare cases, insist) on dealing only with a limited company. Details of the company being available to view via Companies House can give comfort to both existing and prospective customers.
Disadvantages of becoming a limited company
Appearing on the public record
Information about your limited company (including details of the directors, company secretary, shareholders, PSCs and accounts) must be filed with Companies House and will appear on the public record.
Whilst some information can be kept private (such as home addresses and full dates of birth), it may be that you do not wish for information (such as details of accounts, directors, cash position, level of reserves) to be viewable online.
There are costs involved in establishing (incorporation fees) and maintaining a limited company (registered office and company secretarial fees, Confirmation Statement CS01 costs, accountancy and taxation fees). Though by no means prohibitive, the impact of these should be considered.
If a company is deemed a ‘personal service company’, where a director or shareholder operates through their own company rather than taking up employment, the tax benefits of having a Limited company are vastly reduced and given the additional administration costs of running a company, it may be beneficial to be employed by the end client.
If you would like to discuss the above or find out more please do not hesitate to contact us today. Or to see how we can help you and your business, see our business advisory page here.