Do I need to be a Limited Company? Should I go Limited? What are the benefits of going Limited? Is it expensive to go Limited?
This is the most common subject among our sole trader clients and unfortunately, there is no one answer fits all.
It will depend on the objective of your business, the structure of your business and even the industry that you work in.
So, let’s have a look at some of the things you should consider if you’re thinking about becoming a limited company.
1. Limited Liability – Well it’s there in the name isn’t? By operating as a limited company, the liability stops with the company. If you’re a sole trader, who perhaps owns your own home, if something goes wrong- as sole trader those assets are at risk. You are personally liable for your business. However, as limited company the liability stops there (with the exception) of gross negligence, whereas a director of a limited company you can be held personally responsible). If you employ staff, I will always recommend going down the limited company route, simply because employing staff come with more liability and can leave you more vulnerable to lawsuits.
2. Legitimacy – Having a limited company can add that OMMPH to your business, depending on what industry you work in. If you are a consultant, professional or builder having a limited entity can reassure potential customers you are the real deal! However, if you’re a market stall holder, then no one is going to expect you to be a limited business.
3. Cost – Yes, it is no surprise that it is more expensive to be a Limited company, for a start your accountancy fees are going to be more expensive, a full set of accounts statement of financial position to report annually as a minimum. If you are not VAT registered and keeping regular records, this could be a bit of a change as you are going to have to keep accurate and timely records as a limited business. There is also the addition of corporation tax, which as a sole trader, you will never have had to pay, the rate currently is 19%, however any money you take out of the business as a salary will not be liable to corporation tax. There are additional costs of running a limited company such as the ICO registration – if you hold any personal data you will be asked to register for this and the cost of this is £35 per year on direct debit and companies house confirmation statement fees. Not to mention the cost of resource of the additional admin involved. There may be more industry-specific costs that arise, such as the construction fee levy.
4. Business Structure – As a Sole Trader, you are the sole owner of the business, but this may not be how you operate or how you want to operate. You may have a business partner, you may want that agreement formalised and having a limited company can do just that. Especially if the agreement is not 50/50 - We can help you sort out the best option for this. You may have a friend or relative that wants to invest in the company and having a limited company can enable you to set out a formal structure of when that investment will be repaid and if there are any profits associated with the business that the investor will share in.
5. Tax Efficiencies – As a Limited business, you can be eligible for tax incentives that you would not be eligible for as a sole trader. Such as – the recent super deductions, where you can claim 130% against your capital expenditure. As a sole trader you can’t take advantage of this incentive. As a Limited company, you have the option to allocate shares, you may wish to allocate some shares to your spouse for them to receive dividends- which brings me onto dividends in general... a director can take £2,000 in dividends tax-free (Until 5th April 2023, then the threshold is reduced to £1,000) As a sole trader the money you make in that financial year you have to declare as your own income. As a limited business, you don’t have to declare that as your personal income, just as the companies income – so if you had a great year but knew you wanted to spend £15K on a new van in the next financial year as a Limited company that wouldn’t be an issue but as a sole trader you would end up paying tax and national insurance on that 15k and as well which can hamper cash flow. Having a limited business can allows you to spread your income more tax efficiently.
6. Copyrighting your business name – If you have a business that is unique to you and you are worried that a competitor may set up a limited in that name, then registering as limited company will prevent them from doing so.
Every business is different, and I recommend if you’re considering becoming a limited company that you do reach out and speak to us to discuss your individual circumstances. In the majority of cases I recommend to stay as a sole trader as long as it suits you to do so. However, after reading the above, you may think that operating as a limited company is a better option for you.
