One trading option for a business is to operate as a limited company. This will provide access to a number of tax planning strategies and limited liability status. Although there is prestige in operating as a limited company you will lose some of your privacy - directors and shareholders' personal details and abbreviated accounts have to be filed, and are open to public scrutiny.
A limited company is a distinct legal entity that is able to enter into contracts in its own name. This is important as it means that all the company's liabilities are the responsibility of the company - not the directors and shareholders! The only exception is if you, as director of the company, offer a bank or other creditor a personal guarantee to repay the company's debt, if the company cannot.
The pros and cons of incorporating your business?
1. Limited liability status
As explained above this can protect your personal assets from
Business Creditors if for any reason the company has to cease
trading and is unable to clear all its debts. This protection is
especially useful if there are significant risks associated with your
1. Possible double taxation
As the company pays its own tax on profits and gains, it can only
Distribute what is left, the retained profits, to directors and
shareholders. This can give rise to tax being paid both by the
company and by the directors or shareholders when they withdraw
the taxed profits from the company.
2. More cost -
The professional costs in setting up, preparing accounts and tax
returns for companies can be higher than those you would expect to
pay if you were say self employed. Additionally, there are costs in
complying with Companies House Formalities.
3. Audit requirement -
If your company exceeds certain size limits, or is in a particular
trade sector, it may require an audit, incurring further costs. We
can advise on this but generally, most small businesses will be
exempt from audit.
Can we help?
Would a limited company be suitable for your business?
This is not an easy question to ask in just a few short paragraphs. We are more than happy to discuss your individual needs and undertake a proper risk assessment of your business venture. This will enable you to make a balanced judgement on the best way to take your business forward. Be it a limited company or unincorporated, it should allow you to take advantage of the most beneficial tax arrangements available to you, and make sensible choices about action that you can take to minimize your commercial risks.
If you would like to discuss any of the issues raised here, do not hesitate to get in touch.