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Is a company the right vehicle for my business?

There are pros and cons to using a Limited Company as the vehicle for your business. While it may be suitable for many, you should take the time to consider the wider implications and not just be guided by the headline tax rates.

Last updated: 17 July 2020

In order to set up a company, you will need to choose a company name and register the company with Companies House before you can start to trade.

As a director of a limited company, you will have a number of statutory and legal responsibilities, including filing annual returns with Companies House and notifying them of any changes in officers, registered office and share allocations. You are also bound by the general duties of a Director as defined by the Companies Act 2006. Information on the company will be kept on the register at Companies House and is therefore available to the general public.

It is also worth bearing in mind that there are likely to be additional compliance costs for dealing with both the Companies House filings and for dealing with HMRC.

On the plus side, the company is a completely separate legal entity and you therefore have limited liability by trading through a company. This ensures that your personal assets are kept separate from the company’s assets and you should be protected if things go wrong. 

A limited company will pay tax on profits (currently at 19%). To take money out of the company you can draw a salary and/or dividends. There are different tax implications for each of these methods and we will cover this in more detail in a later article.

There is also flexibility for tax planning, as dividends can be delayed until a later tax year in order to use your allowances and rate bands in the most tax efficient way.

A company can also offer flexibility for either bringing in outside investors through share purchases or subscriptions, or for tax planning within the family, whether by employing family members, or issuing them with different classes of shares.

The use of a company may help to present a more professional image for your business and, when it becomes time to sell the whole or part of your business, the process should be cleaner and more attractive to an investor than for an unincorporated business.

One further point to consider is that a significant number of new businesses make losses in their first few years of trading. In a company, these losses can only be carried forward to be set off against future profits. However, for sole traders, it may be possible to carry the losses back to set against the income of earlier years. This could be an important distinction if cash flow could be an important deciding factor in those early years.   

The decision to operate your business as a sole trader or through a limited company is not necessarily as straightforward as it may appear at first glance. The limited company route offers limited liability for its members and can be more tax efficient, but it does come with a heavier burden of administration. The sole trader option is a simpler process and may provide more flexibility, but you may have little or no protection if things go wrong.

It is important to consider all of the implications before making a decision and we would urge you to seek professional advice.

About the author

Paul Hogarth

+44 (0)20 7556 1480
hogarthp@buzzacott.co.uk

Last updated: 17 July 2020

In order to set up a company, you will need to choose a company name and register the company with Companies House before you can start to trade.

As a director of a limited company, you will have a number of statutory and legal responsibilities, including filing annual returns with Companies House and notifying them of any changes in officers, registered office and share allocations. You are also bound by the general duties of a Director as defined by the Companies Act 2006. Information on the company will be kept on the register at Companies House and is therefore available to the general public.

It is also worth bearing in mind that there are likely to be additional compliance costs for dealing with both the Companies House filings and for dealing with HMRC.

On the plus side, the company is a completely separate legal entity and you therefore have limited liability by trading through a company. This ensures that your personal assets are kept separate from the company’s assets and you should be protected if things go wrong. 

A limited company will pay tax on profits (currently at 19%). To take money out of the company you can draw a salary and/or dividends. There are different tax implications for each of these methods and we will cover this in more detail in a later article.

There is also flexibility for tax planning, as dividends can be delayed until a later tax year in order to use your allowances and rate bands in the most tax efficient way.

A company can also offer flexibility for either bringing in outside investors through share purchases or subscriptions, or for tax planning within the family, whether by employing family members, or issuing them with different classes of shares.

The use of a company may help to present a more professional image for your business and, when it becomes time to sell the whole or part of your business, the process should be cleaner and more attractive to an investor than for an unincorporated business.

One further point to consider is that a significant number of new businesses make losses in their first few years of trading. In a company, these losses can only be carried forward to be set off against future profits. However, for sole traders, it may be possible to carry the losses back to set against the income of earlier years. This could be an important distinction if cash flow could be an important deciding factor in those early years.   

The decision to operate your business as a sole trader or through a limited company is not necessarily as straightforward as it may appear at first glance. The limited company route offers limited liability for its members and can be more tax efficient, but it does come with a heavier burden of administration. The sole trader option is a simpler process and may provide more flexibility, but you may have little or no protection if things go wrong.

It is important to consider all of the implications before making a decision and we would urge you to seek professional advice.

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We will be exploring some of these issues further in the rest of this series of articles, but if you have any questions about any of the topics mentioned in this article, please fill in the form below and one of our experts will be in touch.

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