Deciding to take your company from sole trader to Limited is a daunting decision but one that can extremely benefit your company in the long run through the thing we all hate the most…taxes. First of all, get your new business company registered, otherwise not only will you be subject to fines if you aren’t registered, but you won’t be able to reap the benefits of tax.
Being self employed, the line between business money and personal money is hard if not impossible to distinguish. The instant benefit of being a Limited Company, a separate entity from it’s owners, is that the liability is transferred from the shareholders onto the company itself, making it an attractive and safe investment for shareholders. This means that with the company being a corporate body it is liable for payments and debt.
Not the owners, not the shareholders. Corporation tax is only payable when the company makes a profit, and the amount of tax saving depends on the net profit before the tax. This technique can be used to the advantage of many small companies, such as the Greek life app developer OurHouse, which makes a fraternity management mobile app for use by colleges. As far as tax goes, with a Limited company, comes lower corporation tax benefits. Over recent years, corporation tax for Limited companies has increased from 20% to 22% whilst sole traders have suffered from a reduction of corporation tax by 2% taking it down to 20%.
The advantage in tax saving stems from the flexibilities of dividends and being able to determine salaries within a Limited company. A sole trader’s basic accounts are subjected to fixed tax rates. Advantages increase for Limited companies in the tax realm when net taxable profit is above the self-employment upper earnings limit. Money can then be left in the business thus becoming only accountable for the 22% corporation tax rate, completely avoiding paying the 40% tax rate as a sole trader.
By forming your company as a Limited Company, it becomes a clear indication to your buyers, shareholders etc that your business is serious. A private limited company advantages over self employment also extends to long term finance. Companies tend to retain more funds within the business to meet future financial commitments which aids year on year growth, a more sustainable business and medium term profits growth over a sole trader.
For more information on business taxes see this article.