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|Original Message Added : 20 Jan 2009|
I have placed restrictions on my company’s expenses for this year, limiting the amount I spend on each of the categories above and I know there will be other unforeseen expenses this coming year. Due to the afore mentioned facts/ concerns I have 90% decided to become a Ltd Company, but am quite hesitant about making the final step.
My questions are:
a) I'm quite sure that I need to register as a Privately Limited Company, is this correct?
b) What could be the worst thing to come out of registering as a Ltd Company?
c) I understand that I will need a Company Secretary who has to be a separate person to myself, the Director,
1: can I appoint my Finance as company Secretary?
2: what implications would that have on her?
3: How many hours per week would I have show she works?
4: would I need to pay her & if so would this affect her Tax Credits?
d) I also understand that I will have to have an accountant & submit yearly Accounts, I already do self assessment, is this the same as submitting Accounts?
e) Would my Company become or appear more attractive to lenders, if so, how much?
f) I am hoping that becoming a Ltd Company will give it more status, (which seems to be one of the main reasons for most businesses), and that I will be able to receive much more financial help, as my cash flow is abysmal. Would I be able to get this help?
Finally g) Is there anything that I should be made aware of before I register as a Ltd Company, like would my Co. information & activities become public knowledge?
I know there's allot to answer there, but I am very much a spontaneous sort of person and this is far too serious and important to me to just go diving into, I need as much info as possible.
|Reply : 26 Jan 2009|
Firstly, i'm not sure that you do definitely need to be a limited company, there are usually two main reasons why a business would become limited - firstly, if as an individual you are paying higher rate tax, there are probably tax advantages in doing so, but arguably not until then, secondly some business go limited to offer protection to the owner who would potentially only be personally liable if a business failed to the value of their shareholding.
To respond to your points;
a) To form a limited comapny you would need to register with Companies house
b) Increased costs and administrative burden - you would have to file accounts and tax return for the company with HMRC, abbreviated accounts and annual return with Companies House, and still have to complete a personal tax return as a director.
c) No, the new Companies Act means that you don't have to have a seperate Company Secretary, but
1. Yes you could
2. She would be an office holder and you would need to check at www.companieshouse.gov.uk to see the full implications.
3.None, to hold the office of Company Secretary
4. No you wouldn't have to pay her but any income would probably affect tax credits.
d) No, it isn't the same really, as detailed in b) there is far more involved in filing which is why most people find that they have to use an accountant
e) Not necessarily, i don't think it would really make a difference just on its own.
f) I'm not convinced that you would be able to borrow any more money just by becoming limited
g) Yes, your abbreviated accounts would be available for access to the public at Companies House, as would the officers and shareholders information.
|Reply : 27 Jan 2009|
|Reply : 29 Jan 2009|
In addition to the points raised and answered by Tim, I would add the following:
b) the tax return you make as a director is actually more straightforward than your current self assessment so i wouldn't see this as a deal maker/breaker
4) income paid to your fiancée might affect her tax credits but it depends on her overall level of income. if she currently works below 30 hours per week but you raised that to 30 or above she would be entitled to a small boost on her tax credits. but bear in mind if you pay her above the NI threshold of £105pweek you then have NI issues to consider as an employer which can complicate your tax affairs.
d) you don't have to have an accountant, its not an HMRC requirement but many people prefer to use an accountant rather than spend the time learning how to do the accounts themselves. I personally don't find it very difficult but my background helps me there. Having said that i feel that all company directors should know how to read their accounts and interpret the data within them rather than just skimming over the headline figures.
e) i agree with Tim that Ltd status doesn't really change your outward impression to a lender in fact when it comes to borrowing on a personal basis, ie for a mortgage, some lenders see Ltd Co Directors as a higher risk level than the self employed which are again higher risk than employees (without a controlling shareholding).
In terms of financial benefits the tax regime is often seen as more favourable when Ltd as you can avoid paying NI by drawing dividends (but there are some caveats here, because if you have given yourself a contract of employment you must pay yourself at least the minimum wage which will then incur NI as employer and employee)
You can also draw profits from the business by way of employer funded pension contributions which is more tax efficient than dividends but of course the money is not as accessible - so this is often used as an additional method rather than the only way to extract your profits tax efficiently.
a downside of Ltd company status is that if you do any work from home you can only claim a nominal £2 per week allowance for tax purposes whereas there are a whole range of allowances that the self employed can claim (even including part of your mortgage costs if you spend a significant time working from a home office)
There really are many more pros and cons to the switch, but basically the regime for Ltd companies is designed to be more open, ie published data on directors, accounts, address details etc and any HMRC penalties are much, much higher.
Whereas the self employed route offers more privacy and does oblige you to publish financial data.
This is not a move to rush into, it might be a sensible one in the future
I hope that i have been of some help
Darren A Smith
|Reply : 30 Jan 2009|
|Reply : 11 Feb 2009|
When considering the advantages of a private limited company registration against retaining self employed status the decision taken by a sole trader is often entirely focused upon the tax advantages. There are other private limited company advantages and also disadvantages particularly in regard to limited company accounts and administration compared to producing a simple set of sole trader basic accounts.
A private limited company advantages include:
1. Limitation of Liability
There is no distinction between business money and personal money for anyone self employed as all business debts are the personal responsibility of the sole trader. The private limited company advantages are that the company is a separate corporate body and liability for payment of debts stops with the pvt ltd company, the owners, shareholders are not personally liable. The directors are only liable if they continue to trade and incur liabilities after it becomes apparent the ltd company is insolvent.
2. Lower Taxes
Lower corporation tax offered a private limited company advantages over self employment in recent years. The £10,000 tax free limit was cancelled several years ago. Corporation tax rates have increased from 20 per cent to 22 per cent for small ltd companies over the last three years compared with the basic rate tax for a sole trader which has reduced from 22 per cent to 20 per cent Incorporation does still offer tax saving advantages dependent upon the net profit before tax.
The private limited company advantages come from the flexibility of being able to determine the proportions of salary and dividends taken compared with a sole trader whose basic accounts are subject to tax at fixed tax rates and thresholds.
A sole trader receives a £6,035 personal allowance and pays basic rate tax of 20 per cent on the next £34,800 of earnings up to the higher threshold limit and 40 per cent tax thereafter. Class 4 national insurance is 8 per cent of earnings up to the upper primary threshold and 1 per cent thereafter.
Dividends are taxed at 10 per cent on total income up to the higher threshold and 32.5 per cent above. The dividend is a distribution of company profit after corporation tax has been deducted and so the shareholder also receives a dividend tax credit from the pvt ltd company of 10 per cent.
There are significant private limited company advantages regarding tax liability compared to a sole trader where net income is below the upper earnings threshold.
For example assuming the limited company net profit before salary is £35,000. A sole trader would pay income tax of £5,793 plus national insurance of £2,317.20, a total of £8,107.20.
If a salary of £6.035 is taken and the rest is taken in dividends a private limited company would pay £6,372.30 corporation tax, after deducting the salary from net taxable profit and the sole trader now the shareholder would pay no income tax.
The advantages increase where net taxable profit is above the self employment upper earnings limit as money can be left in the business and therefore only subject to the 22 per cent corporation tax rate thereby avoiding the sole trader 40 per cent tax rate. Another possibility is to distribute the shares among family members to reduce the risk of 40 per cent tax.
3. Limited Company accounts and Sole Trader basic accounts
Sole trader basic accounts can be quite simple as a formal accounting system is not required and can be reduced to simple lists of income and expenditure supported by documentary evidence of sales and purchase invoices, effectively single entry bookkeeping. Producing a balance sheet is optional. Due to the simplicity then an accountant may not be required saving a significant cost.
Ltd company accounts have to use double entry bookkeeping to produce the year end accounts including a balance sheet with statutory notes and statements. Unless accounting software is employed to produce the company accounts in this format then accounting knowledge is required and an accountants fee may well be in the region of £500 to £1,000. An accountant is not essential for a small pvt ltd company but is the normal approach and offsets some of the tax advantages.
4. Additional financial considerations
Because a director is also officially an employee of the pvt ltd company this gives rise to a number of considerations in determining the extent of a private limited company advantages.
Pension contributions of a sole trader are personal and while may be deducted from the personal income liability do not form part of the basic accounts. The pension costs including any company contribution to a pension scheme by a private limited company is a deductible business expense as an employee cost.
Using a car for business purposes may have an impact. The sole trader basic accounts would include the business proportion of the vehicle running costs or the mileage allowance. If that vehicle is used by a director then that director is receiving a taxable benefit potentially resulting in a higher tax burden depending upon the type of vehicle as taxable benefits vary. An alternative may be to leave the company vehicle privately owned and the director claim mileage allowances rather than vehicle running costs.
Potentially small issues but there differences in the accounting treatment of deductible expenses such as charitable donations, entertaining expenses and use of home as office. A private limited company advantages consist of being able to claim such expenses as valid business expenses which would not be claimable in the sole trader basic accounts as treated as personal not business.
If the director and main shareholder have other associated companies then the corporation basic tax rate could be affected.
5. Administration, management and business standing
A sole trader basically pleases themselves with regard to the administration and management of the business. A company director is responsible for adhering to company administration according to statutory regulations in regard to both the limited company accounts, statutory books and management as stated in the articles of association. The duties of a director are more formal than a sole trader.
Forming a private limited company is an indication that a business is both serious, has a long term objective and is correctly managed. This psychological perception can increase the business standing of a business. In addition funding requirements are more likely to be met as the lender to a sole trader has to consider the absence of a balance sheet statement in the basic accounts and the financial influences personally affecting the sole trader. A private limited company advantages concern the published financial statements, protection of the financial position from personal influences and the option of increasing security by virtue of asking directors to provide additional personal guarantees.
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.
|Reply : 17 Dec 2009|