Should you register your business as a Limited Company?

  • by Carole Jordan
  • 11 Sep, 2017
should you register your business as a limited company brighton accountants and consultants
A question we're often asked is whether businesses should incorporate from a sole trader/partnership to a limited company. We've outlined some of the benefits to incorporation below, and some of the situations in which we think you definitely shouldn't consider incorporation!

Should I incorporate my business?

This is a question every business owner will ask themselves at some point and it’s worth thinking about because today, in 2017, the tax advantages of a Limited Company compared to an unincorporated business are less than they were and are set to reduce further. 

Running a Limited Company is more complex than operating as a sole trader or partnership as it includes more regulation around your accounts, strict procedures for withdrawal of funds for personal use, and a separate tax return for the company whilst your own tax returns continue as before. In my opinion there have to be good reasons to take on these additional costs.

Reasons to incorporate your business

There are two reasons for definitely becoming an incorporated business; 

  • Your customers expect you to be incorporated, anything else would not carry credibility in your industry. 
  • You wish to protect your personal assets from any claims which could come out of your business activities. 

Equally there are reasons why incorporating may not add too many costs to your business; 

  • If your business is already keeping proper accounting records which include creating a balance sheet the accounting requirements will not require too much extra effort. 
  • If you have employees, because you are already running a payroll, doing salaries for the directors in addition to this will be relatively easy for you. 
  • If you have ambitious plans for growth which means you will need to register for VAT, keep proper accounting records and employ staff within a short period of time.

When not to incorporate your business...

If you are making losses in a sole trader or partnership business these can be offset against your current income in the same tax year, or carried forward against profits in future years in the business, or, if you are in your first three years of trading, carried back against tax you’ve paid in earlier years. 

Unless

You will have sufficient drawings from your Limited Company against which to offset the losses you have accumulated as an unincorporated business. 

Warning!

A Limited Company has to make profits to distribute dividends. If that is not possible you could end up paying not only tax and employees national insurance on director and shareholder salaries but employers national insurance too. A combined tax rate of a whopping 45.8%!

 

Tax and National Insurance Savings

If none of the above apply to you then look to see if you would benefit from some tax and national insurance savings which would make the extra effort and discipline in running your business through a company worthwhile.

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