The Pros and Cons of Becoming a Limited Company
Britain is fast becoming a nation of independent business people. For many it’s a case of having to create their own job in a turbulent jobs market; for others it’s a case of wanting to branch out on their own and have more control. Either way, doing so presents you with all sorts of questions, not least of which is whether to set up as a limited company.
There are all sorts of advantages to this – here are just a few.
- Tax: The bugbear of every working person. Companies pay a corporation tax of 20% and that applies no matter how big your profits might be. As a sole trader, you could quickly find yourself in a higher tax bracket. Any profits higher than £43,000 will be taxed at 40% and profits over £150,000 will be taxed at 45%. For the 2017/18 tax year the basic rate limit rises to £45,000.
- Limited liability: The biggest attraction is limited liability. If the company should run into any financial trouble, you – and any other shareholders – will not be personally exposed. If the company gets into a position where it can no longer pay its debts, shareholders are only liable up to a nominal value of their shareholding. This could be as little as £1.
- If you’re operating as a sole trader your personal finances will not be protected in quite the same way.
- It looks good: Being a limited company gives you a professional status. It gives you a corporate image which boosts the value of your business. Businesses are more likely to work with limited companies than sole traders, so it could increase your chances of securing big contracts.
There are downsides. It involves work. Setting up as a limited company can be quite a process and may be pretty daunting. You must register with Companies House; information about you, the director, and the company will be displayed in public. There are restrictions on the company name and it can be difficult to withdraw money from the company. Against that, operating as a sole trader is comparatively straightforward. You can start any time you like and the registration process is quick and easy. Accounting requirements are more complex and administration takes time and effort. That can all be time you should be spending delivering your business.
It can be expensive. There are more costs involved with setting up and you will not be able to be a director if you have previously been declared bankrupt. Equally the cost of accounts can be higher and you may need to hire a professional accountant.
Many SMEs and freelance contractors will struggle to afford a full time accountant which is why it can pay to outsource the operation to an external firm. That’s one of the things we do at Abacus – We help both freelancers and SMEs through the process of company formation. We can provide advice and support and we can guide you through the whole process as well as providing ongoing accounting services. This can be a daunting process but with the right help and advice you can make it work for you.