Should You Trade Through a Limited Company?

Choosing how you structure your business is an important decision. For many business owners, the question of whether to trade as a sole trader or through a limited company will come up as the business grows.

There are a number of factors to consider, and while tax is often a key part of the decision, it should not be the only consideration.

Before making the switch to a limited company, there are four key areas to look at: profit, tax, how you pay yourself and risk.

1. Consider Your Level of Profit

The level of profit your business generates is an important factor when considering whether incorporation is right for you.

As your profits increase, the tax position and the way you take money from the business can become more important. However, there is no single profit level at which incorporating automatically becomes the right answer.

It is important to consider:

• How much profit the business is currently generating.

• Whether profits are expected to increase or decrease.

• How much of the profit you need to take from the business personally.

• Whether you intend to leave profits in the business to fund future growth.

• The additional costs and administration involved in operating through a limited company.

Looking at the overall position, rather than focusing on a single figure, will help you understand whether incorporation could work for your business.

2. Understand the Tax Implications

Tax is often one of the main reasons business owners consider incorporating, but it is important to understand the full tax position before making a decision.

Trading through a limited company means the company and you personally are separate for tax purposes. The way profits are taxed and subsequently extracted from the company needs to be considered as part of the overall picture.

Some things to consider are:

• The tax payable by the company on its profits.

• How much tax you may pay personally when taking money from the company.

• The different ways you can extract funds from the business.

• The timing of tax payments and how these affect your personal and business cash flow.

• Whether profits will be retained in the company or taken out personally.

Don’t simply look at the headline tax rate. The important question is what the overall tax position looks like for you and your business.

3. Consider How You Will Pay Yourself

One of the key differences when operating through a limited company is how you take money out of the business.

There are different options available, and the most appropriate approach will depend on your individual circumstances and the needs of the business.

You should consider:

• What level of income you need personally.

• Whether you will take a salary.

• Whether dividends are appropriate.

• Whether some profits can be retained within the company.

• How the timing of payments affects your personal tax position and the company’s cash flow.

How and when you pay yourself can have an impact on when and how much tax is due, so this should be considered before deciding how to structure the business.

4. Consider the Level of Risk

Tax is not the only reason to consider incorporation. The level of risk involved in your business and the protection that a limited company can provide should also form part of the decision.

Think about:

• The type of work your business undertakes.

• The level of financial and contractual risk involved.

• Whether you are entering into significant contracts or commitments.

• Whether you are employing staff or taking on other financial responsibilities.

• What personal guarantees or other obligations you may have.

A limited company is a separate legal entity, but incorporation does not remove all personal risk. It is important to understand what protection the company structure provides and where personal liability may still arise.

There is no one-size-fits-all answer

The decision to incorporate should be based on the individual circumstances of you and your business.

Two businesses generating the same level of profit could reach completely different conclusions depending on how much the owners need to take from the business, their future plans, the level of risk involved and whether profits will be retained to fund growth. Before making the decision, consider the full picture rather than simply the potential tax savings.

Our team can help you understand the financial and tax implications of different business structures and determine whether incorporating could be right for you. Please get in touch for more information.