Business owners are often unsure about which entity to trade as – sole trade, partnership or limited company. Regardless of size, ownership structure, industry etc, generally there is no legal obligation to trade using a particular entity, but there are stark differences between them. And it is the impact of these differences that must be evaluated in order to decide which entity to trade as.
Hundreds of freelancers, contractors and small businesses decide to form a limited company every day in the UK. There are many reasons a sole trader or small business may choose to incorporate, however the three main advantages of going Limited are:
Limited liability basically means if your company goes bust, your personal property can’t be touched. Your maximum losses can only be up to what you put into the company in the first place – meaning you only stand to lose what you invested. Limited liability can become invalid if you act illegally though – so don’t do anything naughty!
Many clients – especially big corporates – will be more inclined to do business with limited companies. For them it means your payment is purely a business transaction and they avoid the muddy waters of PAYE and national insurance contributions. In fact, many large companies (usually financial institutions) refuse to do business with sole traders.
As a sole trader, you’ll be taxed on your income. This means you’ll end up paying income tax and national insurance contributions on everything you earn. Once you get into the higher echelons of earning you could be seeing a significant chunk of your take-home pay being whisked away by the tax man. By operating through a limited company you will pay corporation tax of 20% (assuming your profits are less than £300,000), and can pay yourself through a combination of low wage (to minimise your PAYE and NIC outgoings) and dividends. This will result in less of your money going to HMRC, meaning more of it in your pocket.
Although forming a limited company can be a sensible and beneficial business move, it does come with certain duties that you, as a director, must perform.:
Duties of limited company directors
The Companies Act 2006 outlines the statutory duties of company directors as seven general duties;
- Duty to act within your powers as a company director
- Duty to promote the success of your company
- Duty to exercise independent judgement
- Duty to exercise reasonable care, skill and diligence
- Duty to avoid conflicts of interest
- Duty not to accept benefits from third parties
- Duty to declare interest in proposed transaction or arrangement with the company
As a company director, you have several accounting-related obligations, it is best to employ a good accountant (Abacus Accountancy) to ensure that all tasks are carried out:
- Keep good accounting records from which accounts can be prepared which give a true and fair representation of the financial position of the company.
- You must submit accurate company accounts, and file them on time with Companies House.
- You must submit your corporation tax return (Form CT600) to HMRC and pay any tax liabilities due.
- You must deal with the correct payment of staff (and yourself) – including the deduction of income tax and national insurance contributions, where they apply.
- You must trade solvently, ensuring that you are able to meet the financial liabilities of your business.
Legal responsibilities of company directors
- You are responsible for completing and filing a Confirmation Statement every year.
- To produce and maintain a register of Persons with Significant Control, the PSC Register must be filed, as part of the Confirmation Statement, with Companies House annually.
- To submit forms to Companies House to notify of any changes in the particulars of company director(s) or company secretary.
- Notify Companies House if you change your registered company address.
- You must always act in the interests of the company shareholders. This means that the directors cannot enrich themselves in a way that damages the company.
If this all seems like too much to get your head around then get in touch, we can set you in the right direction as Director of your limited company and we’re always happy to talk business.