To go Ltd or not to go Ltd

[buttonmoon]

Hi

I hope this is useful to some of you. I know it's a question I have needed to think about and one that is applicable to the electrical industry as much as it is to the other trades. There will be mistakes, out of date information and this document shouldn't be used as an alternative to seeking specialist advice from an accountant. But hopefully it should help clarify some of the important points which should be considered before deciding whether to incorporate as a business.

All comments/criticisms welcome

ps I believe I have correctly attached the file I am talking about. If not this will seem a rather strange post.

 

[sandys]

I used to have a ltd company for previous contracting work and have given it up because of the hassle and cost. If you are of the size where you use a professional bookeeper or accountant to do your accounts and are VAT registered it is worth considering if not don't.

In other words you need sales of £100k or so to make it worth while. The additional hassle is filing the accounts with companies house, keeping reasonable books using Sage or Quickbooks (not for the faint hearted).

 

[MDJ]

Personally I have gone from strength to strength since going Limited, I think it is great if you become VAT registered and start to turn over a lot of money.

 

[Octopus]

My accountant tells me that £30K profit + is the tipping point.

 

[buttonmoon]

According to my calculations 30K is about right. If you keep proper records; invoices, receipts, etc. and you keep your personal and business finances separate and follow your accountant's instructions, it shouldn't be too much of a headache.

 

[MDJ]

Having been a proprietor and now a director I prefer the Ltd company myself, I completely understand someone who says the opposite, it can work for them not being Ltd I'm sure.

 

[sandys]

The other question you need to ask is what benefits you will get out of a LTD company to compensate for the additional costs/hassle I mention above.

There are 2 main ones
1. Limited liability. If someone sues you and wins your maximum liability is what's in the company. If you were a sole trader then they can go after your house and all your assets if the claim was big enough. If push comes to shove with a company you can put it into liqudation as a lot of dodgy builders have done.

2. You have to pay tax on your profits in a company but that is less than higher rate tax. If you don't need all the cash you can leave it in the business and only pay the higher rate tax when you take it out. This is what all the fuss was about earlier in the year when a lot of BBC people & Ken Livingsdtone were found to be contractors paid through a company rather than on PAYE like normal folk.

The ideal thing is to pay yourself via dividends so you don't pay employers NI on what you take out but the revenue has rules to try and prevent this.

 

[buttonmoon]

The limited liability aspect is considered to be one of the main advantages of incorporation, but on your second point it's more complicated than that. On pages 13-16 of the attached file there is an analysis of the financial implications of operating as a sole trader or a limited company with a turnover of either 30k or 50k. As Murdoch's accountant pointed out, at 30k there is almost no difference between the two systems but once turnover rises to 50k the difference rises to 3.5k. p15

Basically, you pay yourself a low wage. Opinions differ to an extent on exactly how low is prudent but somewhere above minimum wage. You can then decide how much of your remaining profits you wish to transfer to your personal finances through dividends. This way you take advantage of your tax free allowance, reduce your NIC liability and when it comes to the part of your income which would fall within the higher rate tax band as an employee or sole trader, that money is being received at the lower dividend rate thus resulting in a lower overall tax bill.