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FORMING A LTD COMPANY - SELF EMPLOYED

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Should I Incorporate?

In the early years of a business, the privacy of operating as a sole trader may be attractive. Business funds can be used at will with fewer restrictions than in an incorporated environment. However, as profits increase, trading via a limited company offers tax savings when compared to self-employment.  Additional tax savings can be made by gifting shares to a spouse or civil partner (that you are living with) if their income falls into a lower tax rate than yours.

We are often asked, ‘Should I form a Limited Company?’ The reality is that there is no easy answer. Each situation has to be judged individually. As well as the obvious issues of tax and national insurance contributions (NICs), there are other potentially relevant factors, such as:

  • The nature of the business and its expected rate of growth
  • The degree of commercial risk
  • Administrative obligations
  • Personal preferences
  • Pensions
  • Possible advantages of incorporation

    • Incorporation normally provides limited liability. If a shareholder has paid fully for his or her shares, he or she cannot normally be required to invest any more in the company. Although companies with bank borrowings often have to provide directors’ personal guarantees, the protection of limited liability will generally apply in respect of liabilities.
    • A company enjoys legal continuity, it can own property, sue and be sued.
    • Effective ownership or part ownership of the business may be readily transferred, subject to the provisions of the Articles of Association.
    • Shareholders can be paid in dividends (currently free of NICs)
    • Growing businesses can re-invest profits after an overall tax charge of 20%.
    • Corporate status is sometimes thought to add to the commercial respectability of the business.
    • Employees may be offered an opportunity to buy their own stake in the business.
    • The National Minimum Wage does not apply to directors (as they are office holders)
  • Potential disadvantages of incorporation

    • Formation of a company incurs administrative costs.
    • Customers and suppliers must be informed of a change to limited company status.
    • The tax position arising on the incorporation of an existing business needs careful analysis. It may be possible to defer capital gains tax on the transfer of goodwill etc.
    • A company's accounts must be filed on public view with the Registrar of Companies.
    • Funds withdrawn from a company normally give rise to tax liabilities.
    • Remuneration for directors is subject to both employee's and employer's National Insurance liabilities. Both the company and its directors are liable to NIC on many benefits in kind, and a form P11D must be prepared for each director.
    • Tax on directors' remuneration paid monthly is payable on the 19th of the following month  through the PAYE system, and corporation tax is payable nine months and one day after the end of a company's accounting period. For a sole trader or partnership, tax is generally paid by instalments on 31 January and 31 July on the current year basis.
    • Companies pay tax on capital gains at their corporation tax rate. In a company, a capital gain is reflected in the value of its shares and if these are sold a "double charge" to CGT can arise.
    • An individual has greater flexibility in dealing with trading losses.

Call us to talk about our limited company services and the options we can provide.

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