Usually the accountant of a small business (sole trader or partnership) will advise the best time to go ‘limited’. Once you have all the information it then becomes a matter of personal choice. So what is a limited company (also known as a limited liability, an incorporated company and private limited company)?
The main difference from a legal position is that, operating as a limited company, you and your business become distinct (separate) legal entities. Revenue and payments come in and out of your business’s bank account, not yours. The distinction means that if things should go horribly wrong and you go bust, you may only stand to lose what you invested in the business. Your creditors or the people you owe money to, can’t touch your personal belongings.
But there are more positive advantages of being ‘limited’. It may be you and your business can become more tax efficient. As an employee or sole trader your options in terms of how you handle your income are fairly limited; money arrives in your account, you pay tax on it.
As the director of a limited company you have a few more options. Your income will actually be revenue for your company, which you can withdraw as a salary, a dividend (which attracts a lower tax rate), or even leave in the company altogether.
In addition as a limited company you will also only pay corporation tax on your profits, rather than income tax and national insurance on your entire income.
Of course there is also an added advantage that your customers may consider it preferable to dealing with a limited company that a sole trader.
So what are the downsides? You as a director will have to abide by the Directors Fiduciary Responsibilities which in a nutshell say that as a director you should reflect a relationship of trust and loyalty between yourself, the company, its members, and stakeholders.
This helps to ensure that employees and other stakeholders receive consideration during a director’s decision-making process, as well as the company and its members. It is worth remembering that you have a responsibility to the company.
Companies House has just published a press release with some interesting data about limited liabilities and maybe before deciding you should have a little look at what they say at https://www.gov.uk/government/news/uk-company-statistics-2018-to-2019
In essence there has been an increase of 8.5% of new companies up to end of March 2019 making the total register 4.2m companies. However the number of dissolutions (companies folding) went up to 508,865 in the same period and the average age dropped from 10.7 years to 8.5 years.