In the business world today, businesses need to be conscious and tactical about issues like taxation, because it could be the main reason why a company makes a profit, breaks even, or run at a loss.
The most common type of company that can be easily set up by individuals is a Private Limited Company and a sole proprietorship, which is more commonly known as being “self-employed”.
In this article, we’ll be looking at the advantages and disadvantages of both to see if you could save on your tax bill by becoming a Private Limited Company
What is a Private Limited Company?
We touched upon this briefly in our previous blog; Is limited company status right for my Warrington business?. There are three types of a limited company, which include Private Limited Company, Limited Liability Partnership, and a Public Limited Company. You’ll have often seen many companies with an abbreviation at the end of their company name or logo, such as ‘LTD’ For A limited company, ‘LLP’ for a limited liability partnership and ‘PLC’ for a public limited company. Typically, when people refer to a limited company, they’re talking about a Private Limited Company. Private limited companies have ‘limited liability’ status and are their own legal entity that can have one or multiple directors and shareholders. This ‘limited liability’ status means that you won’t be personally liable should the business make any financial losses, instead, a value will be attached to all of the company’s shares, and it is these shares that will be at risk should the company fails. This means that the risk of anything going wrong with the business is limited to the value of the shares, which is ideal if you’re a homeowner as if the worst does happen, you’re home won’t be at risk.
Will I pay less tax as a Private Limited Company?
If you’re a sole trader, you’ll be paying income tax and national insurance, however, with a limited company, you’d only have to pay the 19% corporation tax on your profits, which is set to be slashed further in 2020 to just 17%. As the government views your business as its own legal entity with limited liability, you would need to get paid through a salary or a dividend. Naturally if you are earning a salary, you’ll be required to pay national insurance and income tax, however, if your salary is under the threshold for paying national insurance and income tax, then this salary won’t be touched by income tax or national insurance. This would mean that as of April 2019, you’d have to ensure your wage was under £12,500 per annum to avoid paying income tax. National insurance, however, would still be paid if you were paying yourself £12,500. You start paying national insurance once you earn more than £166 per week, so in order to avoid this, you’d need to ensure your weekly wage is £166 and under or £8,632 per annum.
What are the advantages of becoming a limited company?
- Legal entity: With a limited company, you get the added security of having your personal belongings protected, due to the fact that your company is its own legal entity with limited liability.
- Easy succession: a private limited company can be easily overtaken by a shareholder or any of the company members. However, as a sole trader, this process would be much more difficult.
- Tax benefits: this is one of the most advantageous aspects of setting up a private company. Ltd companies could bring additional tax benefits and are often subject to lower corporation tax. In some cases, you can even still qualify for child benefit.
- Professionalism: for many, having a limited company status can appear professional and more trustworthy. Some organisations will often only deal with limited companies so this can bring your business extra clients in some cases
- Pensions: This could also be included within the tax benefits point mentioned earlier, as limited companies can put pensions through as a business expense, saving on tax.
Sole Trader vs Limited Company
Naturally, there are some benefits from being a sole trader rather than becoming a limited company. Firstly, a limited company does come with extra paperwork, paperwork that you as a sole trader wouldn’t have to consider. This is because a limited company has more legal duties and you as a sole trader are in control of everything. If you’re a limited company you’ll need to hold an annual general meeting (AGM) each year and keep the minutes, always have a registered office displayed, complete Corporation Tax Returns and pay Corporation Tax, comply with the companies act, complete documentation when a director is appointed or dismissed, and more.
As a sole trader, you are viewed to the government as the business, completely different to a limited company whereby the limited company is its own entity. With being a sole trader, you can take as much money from the business as you want, whenever you want, and these withdrawals will be treated as part of your wages on your Self-Assessment Tax Return.
You can actually acquire insurance policies that will provide you with the same level of security you get from becoming a limited company and staying as a sole trader. Often, insurance providers of professional indemnity insurance can provide insurance for sole traders.
Shut up shop
As a sole trader, it’s much easier for you to close the business down than it is if you were a limited company. As a limited company, you must produce annual accounts and file them both with HMRC and companies house. You’ll also need to apply to close the company at the company’s house too. It’s a lot of paperwork, which is sometimes why some hold off the limited status.
Author: Contractor Unlimited