As a firm of accountants, we are often asked one question by sole traders and partnerships – should I become a limited company? What are the benefits? And are there any drawbacks?
Here is a quick and simple guide to the impact of transferring your business into a limited company.
Limited liability
Perhaps the most obvious benefit is the fact that any liability for financial losses incurred by your business falls with the company, so you would not be personally liable for any business debts or liabilities. The company is a separate legal entity, so can enter into contracts and own property in its own right.
Tax saving
The other key area involves tax efficiency. In most cases company owners can extract a greater proportion of their earnings. A company shareholder can take a modest salary below the tax threshold and then take further earnings as dividends, which are not subject to national insurance contributions and can often be taxed at a lower rate. This is often the major factor when a business decides to incorporate.
Shareholders
A limited company can have a number of shareholders, who can potentially introduce capital into the business, and having multiple shareholders also helps to spread the risk. If one or more shareholders leave the business the company can continue, and the entity can carry on with different owners over time.
Company name
When a limited company is incorporated, the name of the business is protected, as other companies cannot use the name that you have chosen. This protects the brand and other companies will not be able to trade under the same name.
Image
A limited company can often project a more professional image for a small business, and so in turn may assist with attracting new customers.
Administration costs
A limited company has several benefits, as seen above, but the administration costs of running a company are marginally greater than those of a sole trader or partnership. Accounts need to be prepared in the correct format for filing at Companies House, and various other documents may be required to be filed too. This additional cost needs to be considered but is often outweighed by the numerous advantages described above.
So – if you are a small business owner and are thinking about the future, then consider the points above. It could save you money, protect your business and help you prosper.
The next step
For more information, please contact Gareth Cliffe on g.cliffe@uhy-manchester.com, or your usual UHY adviser.
