When most people start their own business, they choose the quick and easy route – establishing as a sole trader or partnership. Both legal structures are simple, uncomplicated, and are the perfect option for early-stage businesses.
As time goes on, and your business grows and matures, you may be wondering if it’s right to “go limited” and make the transition to a limited company.
But how do you know when it makes sense? Let’s take a look.
What are the pros of going limited?
As we covered in our guide, there are some big advantages to incorporating, and forming a limited company. Some of the main ones include:
- Your business will be its own legal entity: When you’re a sole trader or partnership, you are your business and your business is you. This means that if things go south, your business’s creditors could go after your personal finances for what they’re owed. However, when your company is limited so is your liability – in that case, you only stand to lose what you’ve invested in the business.
- You can raise capital by selling shares: As a sole trader or partnership, your ability to raise capital is restricted to loans or other types of credit. Whereas if you set up as a company limited by shares, you can sell a stake in your company in return for capital.
- You’ll probably pay less tax: When you take your salary as a sole trader or as someone in a partnership, you pay national insurance contributions on the entire amount. However, as the director of a limited company, you can take some of your income as dividends, which are taxed separately and aren’t subject to NICs.
What are the cons?
But it’s worth bearing in mind that there are some disadvantages too, such as:
- More scrutiny and regulation: Limited companies are exposed to a greater degree of regulation and scrutiny than sole traders or partnerships. For example, you’ll need to submit annual accounts and a confirmation statement to Companies House which are then kept on public record. The extra aggro might not be worth it for the benefits.
- Your accountancy fees will probably be higher: Doing the accounts for a limited company is more complex than for a sole trader or partnership. And because of the extra responsibilities, such as annual statements which needed to be submitted to HMRC and Companies House, your accountant is likely to charge a higher fee.
So how do you know when the time is right?
Well, there’s no easy answer to that question as it depends on your business and what stage it’s at. There is no one-size-fits-all approach. It’ll make sense for some companies to incorporate early, whereas others might need to wait until they’ve grown a little more.
GoLimited, a company formation agent, says that their general advice is for companies to incorporate when their turnover reaches around £15,000. They say that at this point, a company could start saving money. They caution however that “every situation is different.”
By contrast, SJD Accountancy says the threshold is around £25,000.
Ultimately, the decision is down to you and your accountant. By speaking to your them, you’ll be able to get a good idea of when you’re ready to make the leap to incorporation, and hopefully start seeing the benefits.
Bear in mind: This post is for general information only. Make sure you consult with a professional advisor before you make any important decisions.