UK businesses consist of sole traders, partnerships and companies – we give some thoughts as to whether Company Formation is the option for you. There are also limited liability partnerships, companies limited by guarantee and other unusual beasts – but this blog looks only at the Limited Company.
We will look at the advantages and disadvantages that you will find to help you decide if it is right for you.
1. Incorporating for Tax advantages?
Dividends and Salary – As the company’s shareholder/director you wear two caps – you get rewards for your hard work as an employee and also you get reward for your entrepreneurship as a shareholder. This means you are able to split your income into salary and dividends which could generate large income tax and national insurance savings.
National Insurance – As the owner of a company you have more scope than many to undertake effective national insurance planning.
Corporation Tax – The Corporation Tax regime is lighter than income tax with most small owner managed companies paying corporation tax at a rate of 20%.
This compares with a 50% higher rate of income tax which is paid by sole traders and those people who belong to partnerships.
2. Non tax reasons to Incorporate
Limited Liability Protection – Basically this means that a company’s shareholders cannot be sued by outsiders for the debts of the company as they are separate. Although cautious lenders and creditors may require personal guarantees, this could provide invaluable security in certain circumstances.
Borrowing Money – It is potentially easier as a company to raise additional finance for example by raising a floating charge of the company’s assets or by raising equity finance.
Enhanced Status – Trading as a company is often perceived to have more prestige than by trading in your own name. People often have more faith when they see Limited in the company’s name even if in practice there is virtually no difference.
Flexibility of Ownership – New people can be easily brought into the ownership of a Limited company. It also gives you the ability to separate ownership and management if that is attractive to you especially if you want to keep your stake in the business but not be involved in the day to day management.
Continuity – A Limited Company structure allows for a smooth exit from the business – the company can continue even if a company member retires, dies or simply wants to move on.
3. And the drawbacks
Costs – There are set up and monthly costs for the company secretarial and accounting aspects but in most cases the tax savings should easily cover these extra fees.
Company Law – As a company director you will be subject toUK company law.
Reporting Requirements – You will need to file your annual accounts and returns with Companies House revealing certain of your trading results.
PAYE - this will be applicable to any employees of the company, so you will have to run a payroll and ensure the PAYE is paid over monthly to tax man.
But don’t let these issues cloud your judgement – the benefits of being a Limited Company can be quite considerable and Brookstand Ltd is perfectly placed to help you with these administrative burdens so carry on with your business!
Contact us for more help at mail@Brookstand.co.uk