This is a question every business owner will ask themselves at some point and it’s worth thinking about because today, in 2017, the tax advantages of a Limited Company compared to an unincorporated business are less than they were and are set to reduce further.
Running a Limited Company is more complex than operating as a sole trader or partnership as it includes more regulation around your accounts, strict procedures for withdrawal of funds for personal use, and a separate tax return for the company whilst your own tax returns continue as before. In my opinion there have to be good reasons to take on these additional costs.
There are two reasons for definitely becoming an incorporated business;
Equally there are reasons why incorporating may not add too many costs to your business;
If you are making losses in a sole trader or partnership business these can be offset against your current income in the same tax year, or carried forward against profits in future years in the business, or, if you are in your first three years of trading, carried back against tax you’ve paid in earlier years.
You will have sufficient drawings from your Limited Company against which to offset the losses you have accumulated as an unincorporated business.
A Limited Company has to make profits to distribute dividends. If that is not possible you could end up paying not only tax and employees national insurance on director and shareholder salaries but employers national insurance too. A combined tax rate of a whopping 45.8%!
If none of the above apply to you then look to see if you would benefit from some tax and national insurance savings which would make the extra effort and discipline in running your business through a company worthwhile.
In response to a request from one of our readers I’m going to address losses, which occur in a business on a regular basis for a variety of reasons.
There are proposals to reduce the VAT registration limit to capture more small businesses and increase tax revenue. 55% of small businesses are below the VAT threshold. Find out how you could be effected.
Time for part 3 of your business story blog series! This time we'll be talking about the result of your profit and loss account - the balance sheet!
This is a series of blogs to help you understand and analyse your business by understanding your accounts better. This week we're talking overheads and what your net profit figure means.