Choosing between partnership or limited company status

Recent developments have made trading as a limited company more attractive.

However, as Michael Austin, managing director of chartered accountant and business adviser Blue Dot Consulting points out, the tax regime applied to limited companies is quite complex.

“In the early years of a business, the privacy of operating as a sole trader or partnership may be attractive. Business funds can be used at will with fewer restrictions than in an incorporated environment,” notes Austin.

He says you also need to consider other potentially relevant factors, such as the business and its expected rate of growth, the degree of commercial risk, administrative obligations, personal preferences and pensions and retirement.

Admin can be a burden

Brian Baker, partner in the Baker Partnership, which offers advice on accountancy and tax issues, advises the following:

“If you are a particularly small company, the first thing you will need to consider is the administrative burden involved in forming a limited company.

Your accounts will need to be in a certain format which will invariably incur accounting costs and you will need to pay a fee to set up as a limited company, although this can be done very cheaply,” explains Baker.

You will also need to display certain information on your stationery, such as the full registered name of your company, the place of registration, either all or none of the names of the directors, the registration number and the trading address of the company.

You will also need to consider how you will be drawing money out of the company – whether you as directors will be paid in dividends or salaries. If you are paying salaries, you will need to operate a payroll.

“One of the benefits of a limited company is the limited liability it provides. Many people opt to set up a limited company to avoid the risks of unlimited liability, should a problem arise,” adds Baker.

A question of tax

“Growing businesses can re-invest profits after an overall tax charge of up to 19% (if profits are below £30,000), compared with 40% for higher-rate tax paying sole traders and partners. Company profits of up to £10,000 are tax free with a marginal rate of 23.75% on the slice of profits between £10,000 and £50,000.”

Your company will be taxed on its profits of each accounting period, as opposed to the income tax ‘current year’ basis for sole traders and partnerships. You must also file a corporation tax return.

If your profits are relatively small, the extra administration costs of forming a limited company could outweigh the benefits. Baker believes that your tax savings would need to be at least £1,000 a year to make it worthwhile, otherwise it could be “a lot of extra hassle.”

See also: Should I go sole trader, partnership or limited company? – Simon Renshaw, director of AABRS, explains what you need to know about each.

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