Being self-employed comes with a wide range of both benefits and challenges, and we are here to guide you through the tax planning process as your business grows.
One of the most common queries of our clients relates to the option to pursue limited company status.
There are a number of good reasons to make this change, however, every situation is different, and in some cases — this enhanced status may not be necessary.
As your trade grows and you interact with larger firms, having the credibility that limited company status provides — can help you to enjoy the consideration that is sometimes difficult to gain as a sole trader. While there are many advantages to being a sole trader, as your firm grows it will likely not provide the protection and favourable tax treatment that a limited company offers.
To help guide your decision, we have put together this overview highlighting circumstances when becoming a limited company makes good sense. Please don’t hesitate to contact us for further assistance should you want to pursue limited company status.
Why Limited Company Status?
While there are many sole trader advantages, many business owners are wary of the unlimited liability factor of this classification.
Essentially, the limited company advantages hinge upon the added liability protection as well as the more straightforward tax structure after your business has surpassed £11,500 in annual profits.
If you are a small business owner that offers a service that is limited in scale and you will not require outside financing or do not anticipate trading with multinational firms, a sole trader designation can typically meet your needs.
Of course, each situation is unique and an individual who wants to protect their personal assets may not wish to operate as a sole trader.
Whatever your situation, our team is here to provide the guidance and knowledge necessary for you to make the best decision for yourself and your firm. Self-employment can often feel overwhelming, but with the right professional guidance, decisions can become less daunting.
We recommend that our clients look into limited company status if any number of the following are true:
Annual profits exceed £11,500
The enhanced credibility of limited company status is necessary for you to do business with larger and multinational firms
Credit sourcing requirements are such that you need to become a limited company in order to raise capital
Limited company status is desired in order to protect your personal assets
The 19% flat tax on profits is more beneficial to your bottom line
Tax-free salary options are cost effective
£5,000 tax-free dividend allowance offers favourable tax treatment
Credibility, tax treatment, and liability protection are the three main advantages of becoming a limited company.
As your firm grows your needs can change, and it is important that your business status keeps pace with your current level of trade, revenue, and profit. It is not uncommon for SMEs to “grow out of” being a sole trader as the profits of the firm increase.
Sole Trader or Limited Company, Which is Right for Your Situation?
In essence, the main advantage to becoming a limited company from a sole trader lies in the tax benefits and the heightened credibility.
If you are an independent copywriter, hairdresser, or another service provider that does not require outside capital or conduct trade with large companies, then a sole trader designation is likely sufficient for your needs.
Small to medium companies that; have business dealings with large firms; have to pay VAT tax, and do not wish to carry unlimited liability for their enterprise, will likely benefit from becoming a limited company.
In the most general of terms, a common guideline is that once your firm passes the £20,000 threshold it is time to explore moving on from sole trader status.