Q: I am starting my own small business. Should I set up a limited company? What would the benefits be and how would I go about it?
How you structure your new business will depend on your anticipated turnover and how comfortable you are in managing paperwork. The nature of your business will determine the tax you pay, how you can pay yourself from the business’ profits and what happens if your business makes a loss.
There are several business structures you might want to consider:
- Sole trader
- Limited Company
Anyone can set up a business and start trading as a sole trader without any requirement for formal paperwork. You will run your own business and work for yourself, although you are able to employ staff. Once you have paid tax, you are entitled to keep any profits. You are personally responsible for your business and for any losses sustained by it as your liability is unlimited; this means that you must pay for any losses made by the business out of your own pocket. As a result, sole traders are exposed to greater financial risk than those running limited companies.
Trades such as plumbers, electricians and photographers often operate as sole traders, as well as those in the beauty industry.
As a sole trader, you must send an annual Self Assessment tax return to HM Revenue & Customs and pay National Insurance and Income Tax on your business’ profits. If your takings for the year will exceed £81,000 you must also register for VAT.
Instead of setting up your business on your own, you could set up with someone else or even a number of people. In this way you can share the risks and help each other.
You should ask a solicitor to put in place a Partnership Agreement which will set out your relationship to each other, who does what, what hours each partner is expected to work, whether you are putting similar or different amounts of capital into the business and how your profits should be shared.
Like a sole trader, the individual partners in the Partnership remain responsible personally for their actions but they also become responsible individually and jointly for the actions of the Partnership. For that reason, the partners in a Partnership have to have a good working relationship and be able to trust each other. In many cases people get together in business as a Partnership to see whether they can work together and then later become incorporated as a Limited Company.
If you set up a limited company, your personal finances will be kept separate from those of the business. The business itself is responsible for any losses sustained and your liability will be limited to the investment you have made into the company by the purchasing of shares.
Your limited company will have ‘members’ who own shares in the company. If you are a director, you may own shares but you do not necessarily need to do so.
Much greater responsibility comes with directorship of a limited company; you must make decisions for the benefit of the company and try to make it a success for the benefit of its members. You will keep company accounts and records and report to Companies House and HM Revenue & Customs. You are legally responsible for the management of your company and its paperwork.
If a limited company sustains losses or fails, directors are not personally responsible provided that they have complied with all of their directors’ duties.
When setting up your company, you must register it with Companies House and advise HM Revenue & Customs when trading commences. Annually, you must:
- prepare statutory accounts;
- submit an Annual Return to Companies House;
- submit a Company Tax Return to HMRC
Again, if you anticipate your turnover to reach or exceed £81,000 per year you must register for VAT (although it is possible for any business to register for VAT even if turnover is less than this threshold). Directors of limited companies must complete an annual Self Assessment and pay tax and National Insurance through PAYE if you receive a salary from the company.
- Other benefits of a limited company:
As a limited company, you are likely to pay less personal tax than a sole trader or in a Partnership; limited companies pay Corporation Tax and small businesses benefit from a ‘small profits rate’ set at 20%. Directors often choose to take a minimum level of salary with further income from dividends, which minimises National Insurance Contributions and therefore means that directors can keep more of their income.
A limited company brings with it an extra level of professionalism and, if you are working with bigger companies, they may wish only to deal with a limited company rather than a sole trader. You are also able to protect your business’ name with registration at Companies House, avoiding any potential conflicts in the future if you discover another business is operating with the same name.
Mark Boon is a partner at McCarthy Bennett Holland and is experienced in advising entrepreneurs on the set-up of their business, whether as a sole trader, partnership or limited company. Mark will complete the company formation procedures and can advise shareholders and directors where more than one person is involved in the business.
McCarthy Bennett Holland, established in Wigan since 1971, offer a personal service across a wide range of legal practice areas, including residential and commercial property, family and matrimonial, wills and probate, employment, personal injury and company commercial.
Contact Mark Boon partner at MBH Solicitors, to discuss your company commercial or other legal requirements in confidence at:
Tel: 01942 206060
Address: 26 Bridgeman Terrace, Wigan WN1 1TD