It can be a difficult decision, we know, and coming to the right one about when to become a Limited Company is something that requires serious thought – because the correct move can be extremely beneficial while the wrong one could prove very costly.
It’s all about timing and circumstances and, as with anything financial, it’s always a good idea to seek sound professional advice in helping you reach that all-important decision.
Being a Limited Company ensures a layer of separation between you and your business but there are many things to consider before making the decision. If you become Limited before you need to, then it could be expensive.
What you need to think about:
If you are at the point of tipping into the 40% tax bracket and are making more profit than you need to live on, a Limited Company is likely to be beneficial to you. If, however, you need to take out all of the profit for living expenses, then a Limited Company is likely to cost you in terms of both tax and compliance costs, so think carefully before going down that route.
By running a business through a Limited Company, your personal assets are protected in most cases from your business creditors. But if the only creditors you have are the bank, lease or HP companies, then they are likely to ask for a personal guarantee anyway, meaning Limited Liability is of no advantage to you. In terms of staff, if you start to employ people, you may decide that it would be a good idea to have Limited Liability.
You may have no choice but to form a Limited Company if you operate in some industries as your customers may refuse to trade with you as a Sole Trader or Partnership.
Many businesses make losses in their first year because of start-up costs. As a Sole Trader or Partnership, losses are much more flexible and you could end up with a tax refund at a time when you need it most.
A Sole Trader or Partnership is very simple to set up and operate.
Research and Development
If you are carrying out research and development then you have to be a Limited Company in order to claim the tax relief. This can be worth a lot of money to a small business.
If your Limited Company consists of only you offering your services, you may fall foul of the IR35 legislation – which is very expensive. Do not make the mistake of believing people when they tell you it won’t apply until next year. The IR35 legislation has been with us for years and the only thing that is changing is who is responsible for the implementation.
For more information and advice on how we can help you, call us on 01952 216872 or email firstname.lastname@example.org