The natural progression for many businesses is from a sole trader to partnership to limited company. While it may be everyone’s ambition to put “Company Director” in their passport, it is not necessarily a Good Thing. Limited companies are usually formed for two reasons:
- To avoid the loss of personal assets in the event of failure, to limit personal liability
- Tax advantages
This It is generally more tax advantageous to remain a sole trader if your profits are below say £25,000 a year (but budgets change circumstances: check with me). Once you go above approximately £25,000 then we can juggle with salaries and dividends to reduce your tax burden. By extracting money from your limited account by way of dividends, one avoids paying NIC. From April 2019, the first £2,000 of dividends are tax free. Anything over this suffers tax of at least 7.5%. This is inevitably a complex subject – but in essence a sole trader will pay 20% income tax plus national insurance on profit. A company will pay corporation tax at 19% on profits.
> When expanding it is easier to attract new investors into the company simply by issuing shares (and also by involving employees: give them a stake) > By the same token it becomes easier to sell a share in the company than a part of a partnership > When security (financial not burglary) is tight, a company can create a floating charge over its assets (called a debenture:) which allows you to borrow more money > It should be borne in mind that a limited company will not suit everyone. There are more disciplines to be adhered to, than for unincorporated business. Please get in touch.