Limited Company or Sole Trader?
WHY BE A LIMITED COMPANY (AND WHY NOT)?
Straight-talking BOSS finance director Heather Darnell talks you through all you need to know about your company status.
The thought of becoming a limited company can have new entrepreneurs quaking with fear and confusion, but for some it can turn to an advantage. So how do you make that decision when you’re first starting out? Let’s look at the upsides and downsides…
The upsides of being a limited company
If you want to look like your company is bigger than it actually is and add gravitas, ‘Limited Company’ looks and sounds a lot better than ‘sole trader’, and can be more impressive. So it’s all down to who are your customers. If they are sole traders they’re not going to care at all. But if you’re trying to sell your products or services to big companies, they’d much rather be doing business with a limited company.
If for any reason you’re doing business that has any kind of risk associated, say you’re making children’s toys and – worst case scenario – there’s a risk of someone getting hurt, or if your work involves giving people advice and you turn out to be wrong, you absolutely want to start a limited company. Because if the worst happens and someone sues you, they can never sue you personally, only your company. The worst thing that can happen is your company could get shut down, whereas if you’re a sole trader they could take your house!
It is more tax effective to be a limited company and to take your money out in dividends than it is to be a sole trader and pay normal income tax. Now that’s true in all situations once you earn a certain amount of money but if your income is small, you might as well stay a sole trader. Because although it’s more tax-efficient to be a limited company, the extra costs of getting an accountant to do your annual accounts probably won’t be worth it. So if you’re earning under, say, 50k a year or even 40k if your accountancy fees aren’t too expensive, you should stay a sole trader as the extra tax benefits aren’t really that strong. Whereas as soon as you start making more than this amount, you’re throwing money away by paying self-assessment taxes rather than taking advantage of the tax benefits of a limited company.
And the downsides?
There’s only one: the extra account reporting you need to do. You cannot do it yourself – you have to pay a professional to do it, as the rules and requirements for the report change every year. And that is, of course, an extra expense.
So it really does pay to be a limited company if your income is big enough. And if you’re the type who likes to keep the paperwork to a bare minimum, I’m afraid there’s no way round it.
If you’re taking on the world you have to be prepared to do the paperwork. Or pay someone to do it for you.