• Evolve Team

Becoming a Limited company - is it right for you?

Including free resources to help you get started!


At some point in your journey as an entrepreneur, you are going to come across the big dilemma that faces all business owners. Do I turn my business into a Limited Company? It may be a question that needs answering sooner rather than later...


What is a Limited Company?


Let’s start by looking at the main types of business ownership to get a clearer idea of each one:


Sole Trader


A sole trader is any business that is owned and controlled by one person - though as a sole trader you can also have employees of your own. People who provide services like web design, plumbers, hairdressers or photographers are often sole traders. In the eyes of the law, the business and the owner are the same which means, the owner is personally liable for the firm's debts and may have to pay for losses made by the business out of their own pocket. This is called unlimited liability. To pay yourself as a sole trader, you basically just take the money, it’s yours and there's no restriction on when or how you take your drawings so it's very flexible.

Partnership


Partnerships are businesses owned by two or more people. Doctors, dentists and solicitors are typical examples of professionals who may go into partnership together and can benefit from shared expertise. Like a sole trader, most partnerships have unlimited liability though it is possible to register partnerships with limited liability - this is called an LLP - many law firms use this type of business structure.


Limited Company


A limited company has special status in the eyes of the law. These types of companies are incorporated, which means they have their own legal identity and can sue or own assets in their own right. The ownership of a limited company is divided up into equal parts called shares. Whoever owns one or more of these is called a shareholder.


Because limited companies have their own legal identity, their owners are not personally liable for the firm's debts. The shareholders have limited liability, which is the major advantage of this type of business legal structure.


Paying yourself as a director of a Limited Company is more complex. There are stricter rules. The most common method is to take a combination of a low directors salary which has to be done via a payroll and dividends from available after tax profits.


See the resources section at the end of this article for “Paying myself through my Ltd Company” help sheet.


There are two main types of limited company:

  • Public Limited Company (plc) - traded on a stock exchange and subject to a huge amount of legal and financial regulation.

  • Private Limited Company (ltd) - less red tape than the plc but more than a sole trader. We’ll focus on this type of limited company for the rest of this article.




Advantages of a Limited Company


There are a number of considerations to think about when deciding whether to create a Limited Company. There are many advantages:


Professional


A Limited Company can look more professional & attract clients.It is also sometimes easier to get a line of credit with banks and suppliers, which can be essential to growing your business.


Financial


Whilst your accountancy fees will increase because there's more work to be done and it's more complex, if your tax savings are greater than the additional accountancy fees there can be big savings to be made. Use a professional and get this done right!


Security


A Limited Company protects you and your personal assets from being sued or from being personally liable for the company’s debts. Unless you specifically put your house up as collateral, if cannot be taken from you in the case of financial problems with the Limited Company.


Strategic


A Limited Company and its customer base, stock and assets can be sold at a later date if you would like to exit or retire from your company. It is much harder to value and sell the assets of a business that is a sole trader.


Taxes


Although we would never recommend structuring as a limited company solely for tax purposes, it can be the case that you could pay less tax. If your limited company is your sole income source, then it usually is most tax efficient to pay yourself using this combination of director salary and dividend. We have a really useful free help sheet on how to pay yourself through your limited company. The main saving is that you won't have to pay class 4 national insurance. Corporation tax is 19% and tax on dividends is 7.5%.


See the resources section at the end of this article for “Paying myself through my Ltd Company” help sheet.



Disadvantages of a Limited Company


There aren’t really many disadvantages of having a Limited Company but there are things you should think about before committing to this type of business formation:


Record Keeping


As a limited company, your record-keeping must be really good - more so than as a sole trader. You need a dedicated business bank account and there are strict rules about how you can take money out as a director and owner as we mentioned above.


Limited company business expenses are on the whole very similar to sole trader expenses. So things like stock, overheads and equipment are all tax deductible. You do need to give more thought however to the use of personal assets for business purposes when trading as a Ltd company.


See the resources section at the end of this article for “Limited Company business expenses” help sheets.


Your company will need its own bank account and it is important that you only use this bank account for business transactions. Things become very tricky if you use a limited company bank account as your own for things like grocery shopping or to withdraw cash so it's therefore really important that you withdraw money in the correct way.


Deadlines & Paperwork


The deadlines for submitting company accounts and corporation tax returns are different when you are a limited company. Your company year end is normally the month you incorporate. So if you set your company up in March 2019, your year end will be 31 March 2020. You have 9 months to file your accounts with Companies House and 12 months to file your corporation tax return with HMRC.


Bizarrely however, you have to pay your corporation tax 9 months and 1 day after the year-end. Your accountant will therefore usually prepare the accounts and corporation tax return at the same time after your year-end.


You will need to submit an annual confirmation statement to Companies House, which gives key information about the business such as ownership.


You still need to submit a self assessment tax return as a Company Director, but if your Limited Company is your only source of income this is a fairly straightforward task or ask your accountant to take care of this for you.


Ready to Become a Limited Company?


Setting up a Limited company is surprisingly straight forward. You can do this yourself using this link or you can ask your accountant to do it for you.


If you are not sure if a Limited Company is the right step for your business, don’t forget you can start out trading as a sole trader and then become a Limited company later as your business and your business assets/risk and need for capital and security grows.




GET THE FREE RESOURCES


To access the free resources mentioned throughout this article, simply click on the link and enter your email address. You'll get an email containing all the resources mentioned in this article!

Still unsure? Drop us a line? Setting up and supporting Limited Companies is our sweet spot!


☎️TEL: 07841 042077⁣⁣⁣

💻www.evolveaccounting.uk⁣⁣⁣

📧hello@evolveaccounting.uk ⁣⁣⁣



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