Become A Limited Company - Should You, Shouldn't You? Top 5 Questions To Answer

Here are the main questions we ask our clients before making a recommendation:

1. ARE YOU MAKING TAX LOSSES?

Yes - If you are a Sole Trader in your first 4 tax years of trading you can offset these losses against other taxable income from the previous 3 tax years.

For example, you might have given up a well paid employment to follow your self employed dream. Let the tax system help you fund that dream by getting a tax refund.

You can start as a sole trader, and when profitable incorporate your business into a Limited Company.

Remember that tax losses are different to accounting losses. For example, you might have made a trading profit and invested in some equipment or a van. The capital allowances available are very generous and your trading profit might become a tax loss.

2. DO YOU NEED LIMITED LIABILITY FOR COMMERCIAL REASONS?

Or are you a particularly risk-averse person?

If a sole trader enjoys credit from suppliers, or HMRC, you're personally liable for these debts. If you don't settle these debts your personal assets, including your home, are at risk. Many people know they can easily pay their debts and are comfortable with being a sole trader. You should also check that your insurance covers you adequately for other claims.

With a Limited Company, most trading debts and legal claims stay within the company, so your home is usually protected.

3. ARE YOU MAKING TAXABLE PROFITS OF CIRCA £25K?

At this level of profit, you're paying £1,552 of Class 4 National Insurance, so it becomes more worthwhile to consider paying an accountant to incorporate your business because this is the tax you're likely to save.

Running a Limited Company requires more discipline because its cash and assets aren't yours, so it doesn't suit everyone.

4. ARE YOU PLANNING TO EXPAND?

Expansion is possible through bank funding for a sole trader business, but you will be taken more seriously and have more options available to you through a Limited Company.

You can grant very tax efficient 'EMI' share options to incentivise your staff for no up front costs, or allocate some of your shares to Private Equity funding.

5. ARE YOU HAPPY FOR THE PUBLIC TO SEE SUMMARY FINANCIALS?

The Limited Liability of a Limited Company comes with the price of allowing anyone to see the summary numbers you're obliged to file at companies house. This allows suppliers to get an idea of whether to trade with your company.

The summary financials don't show turnover or profit, but they do show your total bank balance and the accumulated profits after you've paid tax and dividends.