When starting a business it’s difficult to choose what type of company to set up. Some people who freelance set up as a sole trader because it’s usually the easiest and most obvious option.
However, some then find that as their business expands they want to change over to a limited company. But when is the best time to do this and what are the benefits?
Why set up a limited company?
Some people feel that having a limited company gives them more credibility to deal with other businesses. Freelancers are sometimes seen as occasional workers or hobbyists and aren’t taken as seriously.
So if you’re after bigger contracts with bigger businesses, you might want to set up as a company to accommodate this.
Widens your client base
Besides general credibility, some businesses or agencies will only work with other limited companies. They just won’t consider working with a freelancer operating as a sole trader. This is usually to do with trust and security.
Distance between you and the company
As the owner of a limited company, you have limited liability over the company. This means that if your company fails you have more protection. As a sole trader, your personal assets like your house, car or any other belongings are potentially at risk if your business fails.
Loans or mortgages access
Some banks will look more favourably on you if you’re the director of a limited company as opposed to a sole trader if you want to apply for a mortgage or a business loan.
As an owner of a limited company, you’ll need to start giving statutory returns to Companies House every year which includes annual tax returns and annual accounts. If you reach the threshold, you might also have to register for VAT.
An accountant will be a great help here if you haven’t got one already. They’ll keep you aware of the important dates for filing information and advise you on how much to keep back for tax payments.
The main concern that people have over incorporating is how much money it costs to do. The initial fees are only small. If you register your company online you’ll have to pay £12, if by post then £40.
However, the costs don’t end there. As you’re dealing with more paperwork, your accountant will most likely have to charge you more than if you were a sole trader. However, this can potentially be offset by tax savings.
While a sole trader simply pays Income Tax and National Insurance contributions, a company will also be liable to pay Corporation Tax. You’ll also be charged Income Tax and NI on any salary you give yourself. In order to become more tax efficient, most people pay themselves dividends as well as a small salary.
If your turnover is low at the moment, then you might find that the extra costs associated with setting up a company are too high. If you’ve got an accountant, you can get some advice from them about what’s best for you.
Are you thinking about starting a limited company? If you’d like to know more about our limited company services, you can visit our website here.