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Thinking of setting up a limited company? Pause and think!
Limited companies are cheap and easy to set up. But working through your own limited company is very different from being an employee or self-employed. You therefore need to consider all the factors before deciding to set one up to ensure you fully understand your obligations. Our new guidance will help you do this.
Starting a new business? Running a limited company is a popular way of doing that – between April and June this year alone, there were 176,115 new companies set up!
But running a limited company is not the only way of being a business – you can also be a sole trader, for example, which is generally much more straightforward. In some cases, due to the administrative requirements, a company is not a suitable way for new businesses to trade at all, particularly if there is only modest income involved.
It is important you understand what it means to set up a limited company and whether that is the right thing for you and your business. It can be an expensive mistake if you then have to pay someone to close it down for you (and deal with any compliance issues that have cropped up in between).
In our new guidance, we look at:
- What is a limited company?
- What are the main reasons people decide to work through a limited company?
- What are the main things I need to be aware of if I work through a limited company?
- How do I get paid if I work through a limited company?
- Can I use an accountant to help me with the admin?
- Special tax rules: IR35/off payroll working
- How can I close down a limited company I have set up?
If you are on benefits, it is important to understand how running a limited company may be treated for benefit purposes.
For example, if you are on universal credit (UC) or may need to claim UC in the future, the limited company structure is completely ignored if you have a trade or property business and your position is like that of a sole trader. This means that directors of their own companies are likely to be treated as self-employed for UC purposes. UC is different in this respect to some other benefits. It is also important to note that directors are NOT considered self-employed for tax purposes or for tax credit purposes.
We explain more on our specialist website Revenuebenefits.
Being a sole trader
There are both advantages and disadvantages to being a sole trader, in comparison to running a limited company. You can find an overview of the main considerations in this briefing note written by our colleagues in the ATT.
If you are starting out, you should not be swayed by people telling you that you have to have a limited company to run a business or that a limited company is more tax efficient than being a sole trader.
What they may not tell you is that the huge amount of paperwork involved in running a limited company and there are additional legal responsibilities of being a company director. This means that any benefit there is, can quickly disappear or be overtaken altogether by having to pay accountants fees or, indeed, penalties if you don’t use an accountant and get things wrong.
We know from the number of people who write into us asking for help with their limited company problems that this is a significant issue, and many people wish they had never got involved with setting up a limited company. Although for some people, it will be the right choice, it is really important to do your own homework and come to an informed decision yourself.
If you are not sure that running a limited company is for you at this time, then you should understand that is totally possible to start your business off as a sole trader, and then turn your business into a limited company at a later date.
From a tax perspective if you would like a better understanding of what the responsibilities and obligations are of being a sole trader, we suggest you read our guide to self-employment.
Contact: Meredith McCammond (click here to Contact Us)
(First published: 26/10/20)