The day has come for you to form your own company. But do you start up as a sole trader or as the director and shareholder of your very own limited company?

In nearly all cases where the turnover of a business is higher than £30,000 and there are few operating costs, a limited company is the better way to go.

There are a number of benefits to be gained by running your business as a Limited Company. One of the main questions at the forefront your mind is likely to be which company structure is going to be the more tax efficient? It is likely that you will pay less corporation tax and personal tax combined as a director of a limited company than you will pay in personal tax operating as a sole trader.

The profits of a limited company are subject to UK corporation tax. The government has indicated that there will be a reduction in the percentage of UK corporation tax of 2% from the tax year starting April 2020, taking it to 17%.

Savings can be made on the amount of National Insurance Contributions you have to pay if you choose to take a small salary and draw most of your income in the form of dividends. This is because limited company dividends are taxed separately and not subject to National Insurance Contributions.

In addition to this, a limited company can retain profits and distribute them as dividends in future tax years if necessary. This means that the directors can delay paying income tax on dividends during a good year and defer paying them until the following year as a way of receiving tax efficient income.

As the name suggests, limited company status gives you the reassurance of limited liability. This means that you will not be personally liable for any financial losses made by your business as long as no fraud has taken place. If you have chosen to be self-employed, you would not enjoy such protection from financial claims if things go wrong.

In some circumstances, it may be easier to secure business finance if you are trading as a Limited Company rather than a sole trader.

A major consideration for everyone in employment is how to provide for their retirement by way of a pension. A limited company can fund its employees’ pensions as a deductible business expense. In these circumstances, this offers a significant tax advantage over those who are running their business as a sole trader.

There are legal requirements that must be adhered to when forming a limited company. For example,

• The company must be registered at Companies House.
• The company’s annual accounts must be filed at Companies House.
• The company must complete and update a confirmation statement once a year

In addition to filing company accounts with Companies House, they must also be filed with HMRC for corporation tax purposes. These are just some of the many responsibilities that the director of a limited company must undertake. However your accountant will be able to advise you on these matters.

If you are currently operating as a sole trader and wish to take all the assets and goodwill into a limited company, it’s possible to do so. Let us know what you’d like to achieve and call the Panthera team for help.

For further information on forming a limited company, contact us on 01235 768 561 or email enquiries@pantheraaccounting.com.