Should I set up my business as a limited company?

Should I set up my business as a limited company? 

One of our most frequently asked questions is ‘should I be setting up as a limited company?’

Here is a balanced view of why you might want to set up a limited company, and why you might not.  Even if Donald down the pub/shop told you you should! 

The short answer on whether you should set up as a limited company? It depends… (probably my most frequently given answer to most accountancy and tax questions).

Let’s say you have decided to set up in business (well done!) or have been going a few years and are thinking about moving to a limited company.  This blog is for you! 

What is a limited company? 

A limited company is a separate legal entity to yourself.  This means any assets (cash) are the company’s, along with any liabilities.  Limited company owners often forget this; that the cash is not actually theirs to do as they please with.  

The company is owned by its shareholders and run by its directors.  For the majority of people reading this it is likely that you will be both shareholder and director, meaning you own the shares of the company and that you run it too.  

Can I set up a limited company myself? 

Absolutely.  For the measly sum of £13 you can register a company with Companies House who keep the register of all UK companies.  Go for it! However…

Consider this. I could potentially attempt to wire a plug, and I might get it half right but make an error at some point, put a wrong wire in somewhere, and then realise I should have just got an electrician in to do it in the first place.  Which then costs more than it would have done in the first place, working on the assumption that that electrician will charge for both the wiring of the plug and sorting my mess out.  Plus I would have used up my time and probably caused a lot of unnecessary stress.  I would then make a note to self – stay in your lane. 

I would say the same about setting up a company.  If the following words bamboozle you – share structures, tax efficiency, legal structure, paid up share capital – then just get a professional to do it for you so the company is set up properly from the start.  It can save a headache further down the line.  

Limited companies – The Good

Legal protection

As mentioned above, the company is a separate legal entity and owners receive a decent amount of legal protection over their personal assets (think your house) if something goes wrong.  Contrast this to a sole trader who is personally liable for everything.  

One caveat – sometimes banks or finance lenders can ask directors to sign personal guarantees so that any liability for debt repayment falls with them rather than the companies.  In general, however, the protection offered by a company is a real plus point.  

This becomes even more desirable if you are taking on employees, going VAT registered – basically anything that carries that bit of extra risk. 

Save tax

The bit everyone (including Donald down the pub) gets excited about.  Companies currently pay corporation tax at 19% on its profits which is generally less than current individual tax rates.

On a personal level, you can pay yourself a mix of salary (think employee) and dividends (a share of the profits if you are a shareholder) which are taxed at different rates which can be really tax efficient, mostly because of lower National Insurance rates and lower dividend tax.  

Introducing a spouse to the company can be another tax efficient way to extract money from the company. 

As with all tax issues, it all depends on your individual circumstances and is another reason to seek advice before you set the company up to make sure the structure is going to be the most tax efficient (and legal).  

There are also some more fun facts around allowable expenditure in a limited company, called trivial benefits.  My favourite example of this; you could buy up to £300 of wine per year through the company (max £50 a bottle), fully tax deductible.  What is not to love?

Other good stuff

Some businesses view limited companies as more ‘professional’ which may be desirable depending on your industry.  

It is easier to bring on other partners (shareholder) or investors, where you can offer up slices of the business by splitting up the shares.  (another reason to set it up properly – see where I am going with this?)

Limited Companies – The Bad

Cost

 You will pay more in accountancy fees to run a limited company.  Fact.  Sole traders can submit their tax returns themselves pretty easily with HMRC (hence the term Self Assessment) but there’s no easily available free software to do the same for companies, and the accounts and company tax return require a far greater level of detail. 

There is also the set up cost if you appoint a professional to set up the company for you. 

You will need some accountancy software to run the company finances through and there will likely be a cost for this, although some banks do provide free software along with business bank accounts. 

The extra costs should be weighed up against any potential tax saving. 

Bookkeeping

If you are a sole trader you might (at the moment!) be getting away with doing your accounts at the end of the year and firing off your tax return.  

This can’t be done with a limited company and regular bookkeeping is required.  You need to know at a given date how the company is doing, what assets it has, what it’s owed etc. This is important so that any money you take out from the company is done so properly and at the correct time (getting this wrong can be costly in tax!)  Up to date information helps this process but there will be a cost here – either in your own time or someone else’s.

If you struggle with keeping on top of bookkeeping as a sole trader then have a think about this point and if having a company will be worth it to you in terms of the extra work required if you decided to do the bookkeeping yourself.  It’s not a once a year job.  

Privacy

The company accounts need to be submitted to Companies House and will be on public record.  In reality this means if someone was sad enough to do so, they could go on there and have a nosey at your company accounts.  They wouldn’t see your sales figure as that page doesn’t need to be filed but they would see the balance sheet which shows your assets and liabilities i.e. your bank balance.  They would also be able to see a list of directors and shareholders.  

Some people are put off by the thought of that.  I am not. Iif someone is looking then they are probably jealous of the fact you have had the gumption to set up your own business.  Don’t worry about it. 

So, should you do it? 

As I said, it depends.  Along with all of the above, you also need to consider your own life goals and circumstances.  It may be that if you speak to a professional and explain your personal circumstances they would recommend a company based on that alone, regardless of the above.  Things like other income, spouses, business aims all have an impact on the decision  

From a tax perspective, an accountant should be able to do a rough fag packet calculation for you to show the potential tax savings if you formed a limited company versus operating as a sole trader, but just remember you would also need to consider the extra cost and time involved.

If I could say just one thing it would be – don’t just do it because someone told you you should!  (Unless that someone is your accountant/business adviser/not a random person who knows nothing about your situation). Think of the bigger picture.  

I hope this has helped.  Get in touch via the contact form if you want to discuss further!