Whether you are just starting out, or considering transferring your business to a limited company, there are many factors to consider. There is certainly no right answer for every business. We strongly recommend that you take professional advice should you be considering whether to trade as a limited company or as self employed (sole trader or partnership).
A major advantage of operating your business as a limited company is that your personal assets are generally not at risk. A shareholder can only be liable for the amount invested in their shares. Assuming there are no irregularities a director will only be liable for amounts, if any, that they have personally guaranteed. Many business people feel a greater sense of control when operating their business bank accounts, assets and liabilities within a limited company.
In return for limited liability, a company must publish certain financial information by filing accounts at Companies House. Although these accounts only show balance sheet items (small businesses do not have to disclose turnover, costs or profits) credit rating agencies and external stakeholders can take some assurance that the business is sound by reviewing the publicly available information. Many banks, suppliers and customers are more comfortable when dealing with a limited company compared to a sole trader.
Ownership of business
A limited company is owned by its shareholder(s) and managed by its director(s). For many small businesses the shareholder(s) and director(s) are the same people. A limited company offers flexibility should you wish to take external investment from new shareholders. Alternatively you may wish to appoint a director without offering shares in the business.
Checking the amount of tax you will pay as a limited company or sole trader is important, but has never been a single deciding factor in choosing the way a business is operated. Recent budget changes mean that the amount of paid by identical sole trader and limited company businesses is similar. A tax saving when operating a limited company does still exist and still exceeds any additional costs for most small businesses.
There are many important tax considerations other than the straight forward amount of tax paid year on year. These include taxes (or tax savings) on transferring from sole trader to company; loss relief available to sole traders; significant differences in taxes relating to cars and pensions.
Preparing and filing accounts and annual returns for a limited company is straightforward, although a little more involved than for a sole trader. Additional fees for a limited company will typically range from £400 to £600 depending on size of business and circumstances.
Transferring from a limited company back to a sole trader or partnership is usually more difficult and more expensive in tax than becoming a limited company. You should not begin to trade as a limited company, or convert to one, with an expectation of being able to revert back without significant additional costs.
This webpage provides general information only and does not constitute advice to any person. We recommend that you take professional advice for all financial and taxation matters and before taking or refraining from any action on the basis of the contents of this website.