If you are starting out in business it can be hard to know which is the best way to go about it. Should you be a sole trader or start your own limited company? For many people, a limited company means that they will save money and minimise the risks that are inevitably taken in business.
Here are the five things you should know before you start a limited company in the UK…
1. Not everybody is eligible to start a limited company
It may not surprise you to learn that some people are not eligible to start a full limited company. The key issue is whether you should be classed as an employee of another company or whether you should be setting up your own business.
You need to ask yourself whether you primarily work for one client. If the answer is yes, then there are a few more questions you need to answer. Do you use tools in your job? This can include anything from a screwdriver to a computer. If the equipment you use is owned by the company you are working for, this is another sign that maybe you should be classified as an employee. Regularly working the same hours for this client can also be a sign that you do not need to set up your own business.
Another simple consideration is whether you have been banned from being a director of a business. This is most likely to occur if you have ever been through bankruptcy.
2. A limited company means less risk
This is perhaps the biggest single reason to start a limited company. The clue is in the title: ‘limited’ refers to limited liability, which means that in the unfortunate event of your business going bankrupted, you will be able to hold on to your assets, including your house. There are less risks associated with a limited company that in being a sole trader as it is only assets associated with the business itself that are at risk of repossession.
“For anybody who is offering more than just their time, their business may require some investment.” Andy Pollard of PL Accountants in Liverpool explains; “If this investment means borrowing money, then their will always be the danger that payments may not be met. If you are a sole trader it can put you at risk, so you should set up a limited company if you feel your business carries risks to your assets.”
3. A limited company can equal smaller tax bills
While you will have to pay yourself a salary, which will be at minimum wage, the rest of your pay will be made up of dividends. The difference with dividends is that you will only pay 10% tax on them, as your company will already be paying tax. This will mean less tax, although not by a dramatic amount once you take into account the 20% rate on your salary and the tax taken from company profits. However, it is still well worth doing for most people.
4. Setting up a limited company in the UK does not need to be expensive
Contrary to popular belief, there is not a major cost disadvantage for those people who are “There is no need to be afraid of the costs of setting up the business side of your new company,” said Andy Pollard from PL Accountants in Liverpool, “I tend to find that new clients are surprised at just how affordable it is to set up your very own company.”
5. Don’t be afraid to ask for help
Just because you are trying to go it alone in business does not mean that you cannot get help! There are experts out there who can help you with all kinds of things, including running your business, so don’t be afraid to pick up the phone and ask for assistance.
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I’m Phil Charnock, a writer who covers finance, health and fitness, music, motorsport and more.
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