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Tax changes have made it even more important to consider carefully, when running a business, whether it is best to trade as:
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 many other potentially relevant factors, such as:
In the early years of a business, the privacy and fewer administrative obligations of operating as a sole trader or partnership may be attractive. Business funds can be used with fewer restrictions than in an incorporated environment.
However, we are considering here the consequences of incorporating or not. A company is a completely separate legal entity subject to two main areas of regulation - tax and company law. This guide looks at some of the advantages and disadvantages of trading as a limited company. It is important to discuss your specific situation with us.
Annual accounts must comply with the requirements of the Companies Act. In most cases, a statutory audit is not required for companies if the company satisfies at least two of the following criteria:
The statutory audit involves work over and above that which is normally carried out for a sole trader or partnership.
A company's accounts must be filed on public view with the Registrar of Companies. An annual confirmation statement (CS01) must also be completed online for the Registrar of Companies. The fee is £12. There is a penalty regime in force for failure to file on time.
The company will be taxed on its profits of each accounting period, as opposed to the income tax 'current year' basis for sole traders and partnerships. A company must file a corporation tax return.
Funds withdrawn from a company normally give rise to tax liabilities, whereas owners of unincorporated businesses can generally introduce and withdraw cash without tax implications.
Remuneration for directors is subject to both employee's and employer's National Insurance liabilities - currently up to 25.8%. For example on a remuneration of £30,000 there may be a NI liability of up to £5,387.25. Both the company and its directors are liable to NIC on many benefits in kind, and a form P11D must be prepared for those in receipt of any benefits in kind and, in some instances, for reimbursed expenses where ‘checking off’ procedures are not in place for employees or directors.
Tax on directors' remuneration paid monthly is payable on the 19th of the following month (22nd for electronic payment) through the PAYE system, and corporation tax is payable nine months 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. The 'credit period' depends upon the choice of accounting date, and you should contact us for further advice on this.
The 'IR35' legislation relating to personal service companies could be relevant, especially for contractors and other service providers who work for only one customer.
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 by the company and shares disposed of, a 'double charge' to capital gains tax can arise. This may be avoided if assets that are likely to increase in value are owned either outside the company or within a self-administered pension scheme, or if a company is sold complete with its assets
An individual has greater flexibility in dealing with trading losses, particularly in the important early years of the business, although corporation tax losses from 1 April 2017 are more flexible than they have been historically.
A company director is more at risk of criminal or civil penalty proceedings, e.g. for late filing of accounts or for breaching the insolvency rules.
Is it beneficial for you to trade through a limited company? Please contact us - we are here to help you through what can sometimes be a maze of options to ensure that you fully understand your options and consequences that are relevant to your situation. There can be no substitute for a detailed analysis, and we are happy to help you in any way we can.
Do call us if you would like further help or advice on this subject.