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Setting up as a Private Limited Company?

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Setting up as a Private Limited Company?

Postby Will_m » Sat Jul 27, 2019 6:03 pm

Hi there, I work primarily as a composer and am currently set-up as a sole trader.

After my latest tax bill I'm looking at the benefits and potential pitfalls of setting myself up as a private limited company in the U.K.

The main advantages as I see it are that I could have a lower tax rate (from 20% to 17% in 2020).

I could also offset my earnings by taking a salary and dividends. For some companies they might see a limited company as more professional.

Would there be any disadvantages to me becoming a limited company? I currently do my own account as my set-up is pretty simple, just invoices and equipment sales for turnover minus equipment and advertising expenses.

Any help would be much appreciated.
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Re: Setting up as a Private Limited Company?

Postby Hugh Robjohns » Sat Jul 27, 2019 6:17 pm

Will_m wrote:Would there be any disadvantages to me becoming a limited company? I currently do my own account as my set-up is pretty simple, just invoices and equipment sales for turnover minus equipment and advertising expenses.

My experience is that it can be a very complex subject with quite subtle pros and cons.

I work through my own limited company (and have done for over 20 years) as it is financially beneficial for me to do so, but only just, at the moment. I know several others in similar situations who have moved back to being a sole trader because that is now better for them and their situation. And, as you say, the taxation rules are due to change again soon so it remains a moving target. My accountant and I re-evaluate the situation every couple of years.

So my best advice would be to discuss this with a good accountant. They will be able to examine your specific situation in detail and devise the best way forward, highlighting the risks and benefits of each approach and the requirements to optimise them.

Edited to add: I meant to comment on the view of other companies you're trading with. I don't think most would care whether you're trading as a sole-trader or a Ltd company. Being VAT registered (or not) is probably a more significant factor to most.
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Re: Setting up as a Private Limited Company?

Postby hobbyist » Sat Jul 27, 2019 8:00 pm

Will_m wrote:Hi there, I work primarily as a composer and am currently set-up as a sole trader.

After my latest tax bill I'm looking at the benefits and potential pitfalls of setting myself up as a private limited company in the U.K.

The main advantages as I see it are that I could have a lower tax rate (from 20% to 17% in 2020).

I could also offset my earnings by taking a salary and dividends. For some companies they might see a limited company as more professional.

Would there be any disadvantages to me becoming a limited company? I currently do my own account as my set-up is pretty simple, just invoices and equipment sales for turnover minus equipment and advertising expenses.

Any help would be much appreciated.


In the colonies it means more paperwork and lots of fees.

3% is not that big a saving to bother with for me; not the way tax laws change almost yearly here anyway. Maybe UK is more stable so you can plan ahead.

OTOH, if you do significant business then you do get (or used to) a lot of deductions that really does help with your taxes. But you could have those anyway if you are truly a business and not a hobby. A company would prove it was business and not a hobbyist looking to short the taxman.

LIke Hugh said, see a professional who can guide you through all pros and cons.
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Re: Setting up as a Private Limited Company?

Postby MOF » Sat Jul 27, 2019 8:15 pm

You have to have your accounts audited each year. If audit fees are greater than the tax savings then think again.
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Re: Setting up as a Private Limited Company?

Postby Hugh Robjohns » Sat Jul 27, 2019 8:23 pm

Its a very valid consideration. However, for a small and simple company the auditing costs are not excessive. My accountant has always (so far) managed to save me more in tax than the filing and accountancy costs etc. But as I said, I also know of people that have benefitted more from the other route. It really does depend a great deal on the specific circumstances and the nature of the business.

H
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Re: Setting up as a Private Limited Company?

Postby Will_m » Sun Jul 28, 2019 12:52 am

Hugh Robjohns wrote:
Will_m wrote:Would there be any disadvantages to me becoming a limited company? I currently do my own account as my set-up is pretty simple, just invoices and equipment sales for turnover minus equipment and advertising expenses.

My experience is that it can be a very complex subject with quite subtle pros and cons.

I work through my own limited company (and have done for over 20 years) as it is financially beneficial for me to do so, but only just, at the moment. I know several others in similar situations who have moved back to being a sole trader because that is now better for them and their situation. And, as you say, the taxation rules are due to change again soon so it remains a moving target. My accountant and I re-evaluate the situation every couple of years.

So my best advice would be to discuss this with a good accountant. They will be able to examine your specific situation in detail and devise the best way forward, highlighting the risks and benefits of each approach and the requirements to optimise them.

Edited to add: I meant to comment on the view of other companies you're trading with. I don't think most would care whether you're trading as a sole-trader or a Ltd company. Being VAT registered (or not) is probably a more significant factor to most.

Thanks Hugh, I'll definitely be getting an account if and when I go forward with it but thought I'd get some first hand advice from as many as possible before getting into that.

MOF wrote:You have to have your accounts audited each year. If audit fees are greater than the tax savings then think again.

I'm not sure on this but I may be exempt under these rules:

https://www.gov.uk/audit-exemptions-for ... -companies

hobbyist wrote:
In the colonies it means more paperwork and lots of fees.

3% is not that big a saving to bother with for me; not the way tax laws change almost yearly here anyway. Maybe UK is more stable so you can plan ahead.

OTOH, if you do significant business then you do get (or used to) a lot of deductions that really does help with your taxes. But you could have those anyway if you are truly a business and not a hobby. A company would prove it was business and not a hobbyist looking to short the taxman.

LIke Hugh said, see a professional who can guide you through all pros and cons.

The deductions are definitely my main interest here, being able to deduct a salary etc.
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Re: Setting up as a Private Limited Company?

Postby MOF » Sun Jul 28, 2019 1:09 am

MOF wrote:
You have to have your accounts audited each year. If audit fees are greater than the tax savings then think again.

I'm not sure on this but I may be exempt under these rules:

https://www.gov.uk/audit-exemptions-for ... -companies

I didn’t know that, I’d always understood that it was a requirement.
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Re: Setting up as a Private Limited Company?

Postby Hugh Robjohns » Sun Jul 28, 2019 1:32 am

Will_m wrote:I'm not sure on this but I may be exempt under these rules:

Yes, I think the audit term was being used as shorthand for filing the required proper company accounts. A formal audit as per a public limited company is a whole different ball game. There is a (small) fee involved in filing limited company accounts with Companies House, and if you use an accountant there will be a cost involved in preparing them and handling the various returns, too. But I've never found this to be onerous.

The deductions are definitely my main interest here, being able to deduct a salary etc.

There are certainly potential benefits in splitting income between salary and dividends, reduced NI payments, and that kind of thing. There may also be tax advantages in paying things like pensions, health care, insurance, mobile phone etc as business expenses rather than from you salaried income. But there a caveats and restrictions to consider, hence the need for professional advice for your specific circumstances.
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Re: Setting up as a Private Limited Company?

Postby hobbyist » Mon Jul 29, 2019 4:38 pm

Will_m wrote:
Hugh Robjohns wrote:
Will_m wrote:Would there be any disadvantages to me becoming a limited company? I currently do my own account as my set-up is pretty simple, just invoices and equipment sales for turnover minus equipment and advertising expenses.

My experience is that it can be a very complex subject with quite subtle pros and cons.

I work through my own limited company (and have done for over 20 years) as it is financially beneficial for me to do so, but only just, at the moment. I know several others in similar situations who have moved back to being a sole trader because that is now better for them and their situation. And, as you say, the taxation rules are due to change again soon so it remains a moving target. My accountant and I re-evaluate the situation every couple of years.

So my best advice would be to discuss this with a good accountant. They will be able to examine your specific situation in detail and devise the best way forward, highlighting the risks and benefits of each approach and the requirements to optimise them.

Edited to add: I meant to comment on the view of other companies you're trading with. I don't think most would care whether you're trading as a sole-trader or a Ltd company. Being VAT registered (or not) is probably a more significant factor to most.

Thanks Hugh, I'll definitely be getting an account if and when I go forward with it but thought I'd get some first hand advice from as many as possible before getting into that.

MOF wrote:You have to have your accounts audited each year. If audit fees are greater than the tax savings then think again.

I'm not sure on this but I may be exempt under these rules:

https://www.gov.uk/audit-exemptions-for ... -companies

hobbyist wrote:
In the colonies it means more paperwork and lots of fees.

3% is not that big a saving to bother with for me; not the way tax laws change almost yearly here anyway. Maybe UK is more stable so you can plan ahead.

OTOH, if you do significant business then you do get (or used to) a lot of deductions that really does help with your taxes. But you could have those anyway if you are truly a business and not a hobby. A company would prove it was business and not a hobbyist looking to short the taxman.

LIke Hugh said, see a professional who can guide you through all pros and cons.

The deductions are definitely my main interest here, being able to deduct a salary etc.

UK must be quite different. Here you deduct the business expenses off your personal income if you are not incorporated. Which can be a big help. But we cannot deduct our salary unless we are incorporated. Then it comes off business taxes and is transferred as income for your personal taxes.

You still have to file for , and pay, taxes on your salary and other income as well as file and pay taxes on the business income.
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Re: Setting up as a Private Limited Company?

Postby Hugh Robjohns » Mon Jul 29, 2019 5:16 pm

Same here, but the different tax rates and thresholds for the different forms of profits, and income streams mean there can be financial benefits to working as a limited company... sometimes... depending on circumstances and how it's all set up and run.

H
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Re: Setting up as a Private Limited Company?

Postby shufflebeat » Mon Jul 29, 2019 6:20 pm

[pedantry]

Is it not public limited company?

[/pedantry]
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Re: Setting up as a Private Limited Company?

Postby wireman » Mon Jul 29, 2019 6:34 pm

shufflebeat wrote:[pedantry]

Is it not public limited company?

[/pedantry]

Yes, it is not.
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Re: Setting up as a Private Limited Company?

Postby Hugh Robjohns » Mon Jul 29, 2019 7:00 pm

shufflebeat wrote:[pedantry]

Is it not public limited company?

[/pedantry]

Only if you make company shares available to the public.
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Re: Setting up as a Private Limited Company?

Postby Watchmaker » Mon Jul 29, 2019 9:06 pm

As a guy with 12 years experience as an auditor, I would suggest you meet with an accountant first. As Hugh points out, the subject is very nuanced and you are unlikely to successfully parse it yourself.

I can tell simply by the way you frame the questions that a professional's guidance will accrue to your benefit. Taxes on income varies greatly based on the source. and while taxation is an important component, structuring a business must take several other important ideas into consideration and the whole thing can be extremely complicated even for a one man shop.
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Re: Setting up as a Private Limited Company?

Postby shufflebeat » Mon Jul 29, 2019 10:48 pm

@Wireman& Hugh

Ah, right. That'll teach me to learn stuff.
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