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Should my company be limited?

Should my company be limited?

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Should my company be limited? A question many of you will ask when venturing out to the world of self employment. Setting up a business on your own can be a daunting process that requires courage, time and the patience to wade through some of the paperwork required to turn your dream into a reality. The first question many soon to be business owners will ask themselves, is whether I should register as a Sole Trader, Partnership or a Limited company? With differing tax rules and regulations for each, making the right choice is a critical one that can save you money and stress in the long run.

What are the differences?Should my company be limited?

There are advantages and disadvantages to both sole trader and limited company status, so take these into account with how your business works and see what is best for you. As a sole trader, there is no difference between business money and personal money as all debt is the responsibility of the sole trader, where as if you are a limited company, the debt is separate and only associated with the company. If for example, your business became insolvent and you are set up as a sole trader, you and any shareholders are responsible for the debt, not just the business, where as registering as a limited company would mean that should the worst happen, you will not be personality liable for costs.

Tax implications

There are also many tax differences. A private limited company has more flexibility to determine how salaries and dividends are split, where a sole trader is taxed at a fixed rate depending on threshold.  Another tricky tax comparison to think about is the personal allowance threshold. A sole trader can get up to £9,440 from April 2013 in personal allowance then pay the basic tax rate of 20% on the next £32,010 earnings.

A private limited company can pay out up to £9,440 in earnings and pay the rest in dividends, meaning their threshold would be lower and could result in not having to pay income tax. More advantages come into play where a private limited company earns above the upper earnings limited, as money can be left within the business and therefore only subject to 20% corporation tax on earnings up to £300,000, avoiding the 40% sole trader tax.

Keeping accountsShould my company be limited?

Company accounts are important regardless of how your business is registered. A sole trader account can be a simple line entry accounting system keeping bank records, sales and purchase receipts. Simple records are easy to keep and you should be able to produce accurate, quality records on your own.  A sole trader is also free to do as they wish with regards to the management and administration of their business.

A director of a limited company has to adhere to the statutory regulations. The company accounts also have to use double entry bookkeeping, along with a balance sheet and statutory notes and statements. It can be costly to put accounting software in place and unless you have accountancy knowledge, you may want to employ a professional to handle this.

Other considerations

Other considerations to take into account are pensions and business expenses. A sole trader’s pension’s contributions will be personal and can be deducted from their personal income allowance and not included in their accounts, where as pension costs including employer contribution is regarded as a deductible business expense at the company’s cost. The use of a car may also have a greater impact for a limited company as use of a company car is also seen as a taxable benefit. The engine size and type of car will depend on the extra tax you pay and in some cases, this can be a substantial amount. Alternatively, you can offer a car allowance and mileage cost to employees. A sole trader would be able to class the use of their vehicle as a business expense rather than taxable benefit.

Think long term

The size and long term plans of for your business will depend on how it is set up. If you are planning on being a one man band, working from home, with no employees and very little costs associated with your business, a sole trader status may be best suited.  However, registering your business as a limited company can often give the impression your business is serious, you have long term goals and the business is correctly managed due to the more formal requirements in the administration.

This may in turn stand a limited company in better stead for the future with regards to funding and financial commitments. Ultimately, the decision is yours and will be based on the needs of you and your business, so remember to think long term and how you want your business to develop and the tax implications before you sign on that dotted line.





About Rebecca Robinson

About Rebecca Robinson

After spending the last 8 years juggling life as a mum of two, wife and working full time as a Project Manager for a global telecommunications company, Rebecca Robinson made the decision to follow her love of writing and took the plunge; turning her passion into a full time career. Since becoming a full time writer, Rebecca has worked with various media and copy-writing companies and with the ability to make any topic relevant and interesting to the reader, now contributes to The Working Parent on articles ranging from credit cards to teenage relationships. Ever the optimist, Rebecca's dreams for the future include a house in the country filled with children, dogs and horses in the field!

Website: Rebecca Robinson

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