Whether your business has started as a hobby or you’ve made the decision to take your skills and experience from an employed role to working for yourself, it’s important to have the right organisational structure in place. Why? Because it impacts everything from personal liability to taxation. The decision requires careful consideration of your specific circumstances, goals, and preferences.
One of the most common questions we’re asked as accountants is whether to incorporate into a limited company (or not). Without an understanding of your personal circumstances, we can’t answer that question specifically for you here in this blog.
There are, of course, lots of pros and cons for either side of the coin, but here are the general rules to consider:
Limited liability protection – becoming a limited company gives your business the advantage of protecting your personal assets. When you’re a sole trader or partnership, your personal assets are at risk if the business faces legal issues or debts.
Portraying a more professional image – A limited company can be perceived as being more credible and professional. Some larger organisations only work with limited companies so this organisational structure could open up the door to more work opportunities.
Tax benefits – there are different tax implications for limited companies and sole traders, so you need to understand which would be the most tax efficient for you. As a sole trader, the money in the business is yours to spend how you like – it’s your responsibility to pay tax when it’s due. For limited companies, the money belongs to the company, and what is spent must be accounted for. How you choose to spend that money on yourself i.e. through salary or dividend, will have an impact on the tax you pay.
Complexity and compliance – Incorporating a business involves more paperwork and ongoing compliance. This means there are higher upfront costs and ongoing admin expenses. There are more regulatory formalities to consider including the filing of annual confirmation statements with Companies House, keeping the statutory registers updated after any changes to directors or shareholdings along with the minutes of all board meetings. Failure to keep up with compliance can lead to penalties for both the company and the directors.
It’s important to remember that you should revisit your organisational structure as your business develops. There may be a point where being a limited company no longer offers the benefits it once did. Your business may function perfectly well and be tax efficient as a sole trader for its lifetime.
If you’re unsure and would like our opinion, we’d gladly answer your questions. We’ve worked with companies of all shapes and sizes, over many decades, so we can offer our expert advice on this important decision. Call the Accounting Clarkes team on 01252 612484 or email gillian@accountingclarkes.co.uk.
If you’re not quite ready to reach out, follow Accounting Clarkes on Facebook or connect with Gillian on LinkedIn here.
