Why trade through a limited company - what's in it for me?
What advantages does trading through a limited company offer you? Well, lots:
- the obvious one and the original intention of limited companies is to protect the shareholders from the company's creditors. If yours is a trade where you buy goods first, then sell them again, then you may owe significant amounts to your suppliers. Unless you have personally guaranteed the amounts owing or, heaven forbid, you've been trading illegally, then your suppliers can only take enforcement action against your company, not you or any other shareholder.
- if you work only or mainly for one person or organisation, then HM Revenue and Customs may determine that you are employed by that organisation. If you sell your services through a limited company, then the question simple doesn't arise. OK, there's no obvious advantage to you, but it makes you more marketable and your potential customers less wary of taking you on. Indeed some big companies, such as British Aerospace won't take you on at all on a temporary contract except through a limited company.
- perhaps you're making big money, enough to push you into higher-rate income tax. You don't need all that income to live on and you resent paying those rates - well, if you operate through a limited company you are in charge of your income and take as much (or little) as you want. Admittedly the company will pay more Corporatoin Tax, but higher rates for companies kick in at a much higher level, and their higher-rate taxes are at a much lower rate.
- perhaps you're not making big money, and want to keep more of it. Taking your income in the form of dividends is much more tax-efficient, because there's no National Insurance on dividends.
- you think that you may be about to go bankrupt. If we form a limited company (with one of us a director, see "a unique service?" elsewhere on this site) and buy the business off you if appropriate, then the Offical Receiver won't touch it. The company employs you so you can keep involved with the business and, when you're financially clean again, we'll hand it back to you.
- if you run several businesses, then you may want to sell one. If that's being run through a separate limited company then a buyer can see much more easily what its trading figures are, and it's a much simpler process to sell it.
- again, if you run more than one business, the turnover of all of them is added together to determine whether you are liable to register for VAT. If you choose to run one or more through limited companies, that doesn't happen. Not having to register for VAT means you don't charge it to your customers, which may make you more competitive, and it takes a lot of admin headache from you.
Surely there's a down side to all this? We have to admit:
- running a limited company means you have more compliance to deal with, tighter deadlines and a few new responsibilities. Because of that, your accounting fees will be higher: a sole trader's accounts run to one page, and sometimes to three lines only. A limited company's accounts take nine pages.
- a company's accounts are a matter of public record, so anyone who wants to know can find out certain details about your business.
- taking your income in the form of dividends may mean you're not paying enough National Insurance for the purposes of your state pension. In that instance we will advise that you contact an IFA for more information.
All those benefits, and only three bullet points against?. Give it some thought...