When going in to business it is vital to understand the implications this choice can have. So we’ve developed a factsheet to help outline the pros and cons of each option.
Your business profits will be taxed under Income tax rules, and partners will be responsible for their share of profits.
- Flexibility – legislation is less strict on the criteria for business expenses.
- Income Tax is payable later than for Company Directors.
- Income Tax is paid in three instalments – in the January of the tax year in which your accounting date falls and the following July & January.
- Lower NI costs compared to income taken as salary from Company.
- Fewer statutory controls – no audit or registration requirements.
- Confidentiality – your financial results do not have to be made public.
- Draw your money out whenever and however you wish.
- Unlimited liability – if your business accumulates debt your creditors are entitled to recover from your personal as well as your business assets.
- Joint & several liability – your creditors could sue you for the full sum owed to them.
- NI payments do not provide the same benefits as employees, eg. Sickness, maternity and unemployment benefits.
- Some organisations will only deal with limited companies.
- You will be taxed on profits even if you do not withdraw the money.
- Personal tax rates are currently higher than rates for small companies.
Your company will be a separate legal entity, distinct from directors and employees who work within it. The company will have owners who are the shareholders, these may or may not also be directors or employees. Your business profits will be taxed under Corporation Tax rules.
- Limited liability – provided no personal guarantees are signed the creditors of the company may only recover their debts from the assets of the company.
- Business easily transferred – because the business stands alone it can be easily transferred by the transfer of shares.
- Improved benefits – as employees of the company directors and staff gain all benefits from National Insurance.
- No other company may use your name.
- Profits can be withdrawn as dividends to reduce tax and NI liability.
- Statutory requirements – Accounts must be in the statutory format. Audit required for Companies with turnover exceeding £6.5m per annum. Accounts must be filed at Companies House.
- Must keep “proper accounting records.”
- Higher administration costs.
- Director’s responsibilities – liable to prosecution if not adhered to.
- Higher National Insurance costs.
- PAYE due on profits withdrawn as salaries and bonuses.
- Drawings can only be taken as Dividends or salary.