Start up FAQs: Should I trade through a Limited company?

The first article in a new series of FAQs covering the key questions and topics  that are relevant when looking to set up a business.

In the first article in the series we will be looking at the pros and cons of setting up as a Limited company.

The rise in self employment and business ownership

Working through a pandemic is undoubtedly changing our attitudes to work. According to a recent survey by freelancer platform Upwork, 20% of current employees are considering going freelance, along with a reported 25% of UK workers planning on changing jobs in the next few months.

As a workforce we are questioning how we work,  who we work for and the why… Seeking greater purpose to what we do, flexibility in how we do it… and in some cases a complete change of direction. The big shift in our ways of working, shopping, socialising and interacting has opened up opportunities for new products and services, to meet emerging demands and fix new problems with innovative solutions.

Though I spend much of my time working with business owners of already established organisation and start-ups, I am having increasing  conversations with business contacts,  friends and acquaintances looking to set up new companies. Either to start a side hustle or they’re breaking away from employment entirely. Maybe it’s bringing a big game changing idea to market, doing some marketing consultancy or setting up a coffee shop?

I have been capturing the recurring questions that are coming out of these conversations to build up a resource of FAQs for perspective business owners…. starting with  a look at company structure.

Should I trade through a Limited company?

There are many things to consider when deciding whether to trade through a limited company (or work on a self-employed basis).

We will start with why you might NOT want to set up a limited company…..

By setting up as a limited company you are legally obliged to file annual accounts and confirmation statement with Companies House and submit a company tax return (as well as your own personal tax return) to HMRC. This means you will likely need to engage an accountant and maintain more comprehensive record keeping.

With a good accountant and use of Cloud accounting and business apps this is not so daunting! But…. for those looking to run a lifestyle business perhaps based around a hobby or craft… or a bit of consulting on the side of your employed job, setting up as limited company might well to be overkill for your needs and trading on a self employed basis might well suffice.

Let’s move on to the 3 top reasons why a limited company might be the right structure for you and your business.

Benefits of a Limited Company structure

1.Opportunities

Particularly, if you are looking to scale your company through investment or perhaps the goal is to sell it eventually then a Limited Company guaranteed by shares is an appropriate legal structure to facilitate this.

You will have the flexibility to issue new shares to investors and in the event of sale of the business or even just passing it to the next generation as the limited company is a standalone separate entity (this means its separate from you).

You also have the ability to set up a group of companies (if relevant) to better manage the affairs of multiple business interests, business properties, different shareholders etc.

And importantly lot of government grants/support packages (such as those available via your local growth hub) are also only available to limited companies, as are R&D tax credits -which are government incentives for innovative activities. 

2.Professional feel and security

Depending on your target market working with a Limited company will give your client base assurances they are working with a ‘proper’ company. Your company will be traceable through Companies House records as well as via credit checking software. Which in certain markets can be very important to build up customers and clients as a trusted supplier.

Having a stand-alone separate entity also reduces your risk if certain things go wrong in your business, as your own personal assets are protected. There is a degree of separation between you as a person and the limited company you own via limited liability shares.

3.Tax planning

As a director/shareholder you will have greater flexibility on how and when you draw a salary. With the choice to take an appropriate mix of salary/dividend across directors in a tax efficient manner and timeframe which usually means you will save some tax vs. if you were trading as self employed.

You are also likely to be able to reclaim more business-related expenses.

If you decide going down the Limited Company route is right for you and your business be sure to check out the next Start Up FAQ for a run down of the practical next steps to starting your Limited company.

Also, get in touch if you would like to put forward a start up question you would like to be answered in this series!