Here are 3 advantages of a limited company and 3 disadvantages when compared to self employment.

Advantage no. 1 – Protection from bankruptcy

If you become a limited company and your business goes bust, it is the company that goes bankrupt not yourself. This means that you can lose your business but not lose your house – very important! The reason this is possible is that in law, a ‘limited company’ means that all the business financial transactions are held in the limited company and are separate to the business owner. This is where the word ‘limited’ comes from. You are ‘limited’ in your liability.The only way this doesn’t happen is if you have given someone control over your personal assets i.e. you have raised money for your business from the bank but the bank has asked for a ‘personal guarantee’ i.e. something that overrides the limited company. In this way, if the business goes bankrupt, the bank come after you.

Advantage no.2 – Commercial credibility

For some business owners, it will be important to appear bigger than they are. Being a limited company helps this (as does becoming VAT registered). This isn’t always a vanity thing. In some industries, it is impossible to trade if you are not a limited company. For example, local councils tend not to want to deal with self-employed individuals.It is worth finding out whether becoming or not becoming a limited company actually matters to customers. For some, it will absolutely matter. Although, I would say, that nobody has ever asked me whether I am a limited company or not (I am!), they are not bothered.The reason why some customers want a limited company is that a limited company appears more official and legal than merely self-employment.

Advantage no. 3 – You save tax as a limited company

This is the best advantage and applies to every business of profits of over £30,000. This is the current tax saving between a limited company and self employment.

  • Profits
  • Tax saving
  • 30,000
  • 1,809
  • 40,000
  • 2,709
  • 50,000
  • 3,821
  • 60,000
  • 4,021
  • 70,000
  • 4,221

You will need an accountant to make sure you get these tax savings (see disadvantages below) but there is a big tax saving for anybody thinking of becoming a limited company.It all sounds good, but before you set up a limited company see below for the three disadvantages….

Disadvantage no. 1 – Accountancy fees are higher

This is because there is three times the level of work needed to run a limited company. Although on the numbers below, at the profit level of £30,000 and above, your tax savings will more than cover this.Also, as a limited company, you will need an accountant. Some self-employed individuals successfully compete their tax returns themselves. As a limited company, you will need to get an accountant since the limited company accounts are far more complicated than a tax return.Here is a run down of what an accountant will do for you if you are a self employed individual or a limited company.

Self employed

  • Personal Tax return
  • Simple accounts (optional)
  • Limited company
  • Personal tax return
  • Director’s payroll
  • Full statutory limited company accounts for HM Revenue & Customs
  • Abbreviated statutory limited company accounts for Companies House
  • Corporation tax return
  • Annual return
  • Dividend vouchers

Disadvantage no. 2 – There is more to do and think about as a limited company

As you can see above, there is more going on with running a limited company and whilst an accountant will do most of it for you, there are more things to be aware of and learn. The relationship with your accountant is likely to be more involved and communication more regular as well.If you are starting a business then self-employment is often the most straight-forward option since it is the easiest to set up (see below). You can also change from self-employment to limited company at any point (although slightly messier to change the other way round).

1. Decide who are the shareholders / directors. Shareholders are more important, these are the people who earn from the company. Directors are responsible for running the company.

2. Decide on a company name, office and email us your name, address, date of birth, occupation, nationality and NI number

3. We will set the company up within 24 hours and email you an incorporation certificate

4. Set up a bank account (you will need your incorporation certificate

5. We will then set up you as an employer (for payroll) and self assessment (for tax returns) and set us up as your agent with HMRC

6. You will receive a letter from the corporation tax office, send it to us

7. Voila

All limited companies need to submit year end accounts and a corporation tax return.

The first strange thing to notice is that the corporation tax return and year end accounts are due 12 months after the year end whilst the corporation tax is actually due 9 months and 1 day after your year end. It is slightly bizarre, but in reality, your year end accounts for Companies House AND HMRC will be completed within 9 months so you know what corporation tax to pay. It is well worth putting the corporation tax due date in your calendar and ensure you build it into your cash flow since it could be a large sum that if not planned, could kill your cash flow.

Whilst you do have 9 months after the year end to complete the accounts and corporation tax return it is far better to complete this much earlier, my recommendation is within 3 months. There are two reasons for this, firstly, so you know how you have performed – sales, profit and cash and secondly, so you know what the corporation tax amount is way in advance of having to pay it. If it is a large sum it is far better to know 6 months in advance than 6 days in advance

Your annual return is a much simpler document than the year end accounts. It is essentially a confirmation that your company name, registered office, director and shareholder’s details are the same. It doesn’t take very long to do and can be completed online. It costs £15 to complete.It has to be completed annually. Just before the anniversary date of your original incorporation date, you get issued with a letter requesting you to complete the annual return within 28 days of the incorporation anniversary date. So in the example above, this annual return would be by 6 July 2016.

The request letter that Companies House is bizarrely over the top, threatening you with a £5,000 fine and dire consequences if you don’t complete the annual return. I guess someone at Companies House must have had a bad day when they drafted the letter because it truly is a very scary looking. However, I have personally never known anybody fined £5,000 for late submission of an annual return when in contrast, the letter to complete the year end accounts is much more serene and I have rarely known anybody NOT to have to pay a fine if they submit the year end accounts.

Pre 2008, getting a mortgage was one of the easiest things in the world.

Since the financial crash of 2008, it has been increasingly difficult for anybody to get a mortgage but if you are self-employed, a freelancer or a contractor it can be even harder.

If you are employed, you can pretty much produce 3 months payslips and most mortgage providers will give you a mortgage providing you earn enough.

The trouble with being self-employed, freelance or a contractor is that you are viewed as a higher risk since (in their eyes) you don’t have a ‘real job’ or you don’t have steady employment.

You can produce your tax return or your accounts but they will often need an accountant to verify the numbers and in some cases, predict the future profitability of your self-employment.

There is also something very important for you to know….

Good accountants will always be trying to save you tax. They will do this by reducing your profits by making sure you have all the legitimate costs in the business. The trouble is that this may go against your desire to get the property of your dreams since you may need your income to be higher.

Also, mortgage companies will often look at your personal tax return and not your limited company accounts. Which means it becomes less about what you actually earn (how much profit you have made in the year) and more about what you have taken out of the company. So you sort of get penalised for leaving money in your company.

There’s two ways around these problems…

Firstly, tell your accountant when you are just beginning to think about moving and secondly, get a decent mortgage broker who can communicate the mortgage provider and will be able to bring in the limited company accounts numbers as well as the tax return.

If there is no trading activity in your business, you still need to submit accounts to Companies House.

This can be done for a very low fee as it is very straightforward.

Make sure you do get this done though as the fines for not submitting accounts to Companies House (even dormant ones) are steep. £150 if overdue, going up to £375 if over 1 month and £750 if over 3 months !!! (They then double if you are late in the next year!)

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