Aug 16, 2018
In this article we propose to lay out simply and clearly the advantages and disadvantages of forming an limited company in the UK, or indeed, anywhere.
A limited company is a corporation, from the latin 'corpus', a body. It is a legal person. It exists separately from its shareholders and directors. There's a certain amount of work in setting it up and maintaining it.
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So why should you, or shouldn't you, set one up?
A self-employed person is taxed at a fixed percentage. In the UK, he gets a tax free allowance, and after that, HMRC wants their bit. He can claim certain expenses, but not as much as he thinks.
A limited company has more leeway in what it can declare as expenses. It can be used as a vehicle to pay its shareholders dividends and its directors' salaries in such a way as to maximise tax avoidance.
Having a limited company on your website, letterhead and business cards is impressive. It means you have gone a step up in the business world. You are no longer Joe Startup, trading from a garden shed, but Joe Director, an employee of 'Mandarino PolyCarbons Ltd'.
With a local phone number and an answering service, you look just as reliable as any company that's traded for 20 years. All you need is to do then is prove it with your business acumen!
Companies prefer to do business with other companies. If they deal with sole traders, they are more likely to abuse them, as they know that, statistically, they are likely to have less leverage against them over an unpaid invoice.
A smart businessman will establish a brand straight away with his company name, and then register it as a trademark, also. Doing this will lock out anyone else from using that name in competition with him.
Be clear: registering a brand name does not protect against someone registering a company of the same name, and vice versa; they are two separate things.
It's also smart to register a name like 'DallyDay DinoMite' instead of 'Corporate Munitions' as the first will come up first in a search on the internet, because it's unique, while the second in unmemorable and the owners will have to fight for recognition.
As a director or employee, monies paid to you for expenses or salaries lessen the company's tax burden, but beware: you need to be clear which are legitimate expenses in the eyes of HMRC and which are not.
Your personal assets are protected if the company gets sued or simply goes bankrupt. You keep your house and the company, as a legal 'person', takes the hit. Your reputation can remain intact.
If the company loses money, it can be shut down without directors or shareholders being entangled with its problems.
If something happens to you, the company can continue separately, earning you money while you recuperate.
If something happens to the company, you will have withdrawn your salary and dividends as you go along and thus you can pick yourself up and start again.
It Can Be Sold
As a thing separate from you, it can be traded to others. By it merely existing separately from you, you have created a tradeable good.
It Can Outlast You
If you die or get ill, your heirs can take over the business and it can put food on the table for them. This is not a small thing.
The directors and initial shareholders will have to 'come out from the shadows' and 'front' their company; their name and public mailing address will be visible at the Companies House website and will end up in other databases and on other websites as a result.
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A company needs to be maintained, by filing annual returns and paying its taxes. Once it goes above about £25k turnover a year you will need to employ an accountant, or, from the very start of operations, if you are not able to balance your own books and file simple tax returns.
Directors have to make sure statutory documents are delivered to Companies House. Failure to do so can be a criminal offence.
If a company's filing record looks bad, that reflects badly on the publicly-listed directors. In the 21st Century 'image is everything'.
A limited company has more complex accounts than a sole trader. Many small businessmen do not understand accountancy terms and thus have to employ an accountant to do their annual returns.
Loss Of Control
Having other directors and shareholders on board means that you cannot now take important decisions quickly without conferring with someone else.
In practice, when you start trading, it becomes more and more apparent when you need to stop being a sole trader and start being a limited company. Your accountant or business colleagues will suggest it, or a brush with a particularly nasty client will make the case for immediate registration!
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