When you first went into business, you were probably faced with the decision of starting a limited company or just registering as a sole trader. For many people, the latter choice is the right decision in the early stages but this can easily change as your business develops. If you have been operating for some time as a sole trader and are doing quite well, it may be time to think about starting a limited company.
If you are considering starting a limited company for your existing business, there are a few factors you will need to consider.
Tax and Finance
Limited companies are taxed in a different way from sole traders. Instead of simply being taxed on your profits when you complete your yearly tax return, starting a limited company will open you up to corporation tax. Company directors are also taxed on any income they take out of the business, which is classed as a separate entity. Dividends are subject to a separate dividend tax.
Whether this setup is more tax-efficient than sole trader tax will vary according to your business’ circumstances, but it generally becomes more likely as your revenue grows. Our team of expert accountants will be able to help you decide whether starting up a limited company will give you any tax advantage, and help you with the process if you want to go through with it.
Liability and Credibility
Two key advantages of limited companies are that they reduce your personal financial liability and increase your business’ credibility. Both of these factors will vary between industries. Some industries involve little risk, making liability almost a non-issue, which for others it is a big concern. In some industries, companies are reluctant to work with sole traders at all, while in others there is little distinction made.
Where these factors are a big concern, people often decide it is worth starting a limited company as soon as they start trading. However, in some cases these factors are not important to begin with but the situation changes as the business grows. If you have gone from strength to strength as a sole trader and found yourself working with bigger companies, you might find you have more need of the credibility that starting a limited company can bring. If the amounts of money involved are greater, you may have more need to reduce your personal liability.
Running Costs and Administration
Becoming the owner of a limited company will open you up to a number of obligations that you did not have as a sole trader. You need to keep Companies House up-to-date on any business changes, and file your annual accounts each year along with your tax return. While sole traders will still need to ensure their accounts and business practices are compliant, they are under much less legal onus to do so.
A business as a sole trader is undoubtedly easier to run than a limited company, but in truth the difference is not as great as it may look on paper. An accountant will be also be able to help ensure that all obligations are met with little extra hassle.