Urban Myths – Limited Companies

October 5, 2021

Recently we’ve heard too many people tell us that they can’t make their company a Limited one unless they earn over a certain amount.  The amounts they tell us change with every person. We’ve had values from £15k to £30k and even £85K.

We can explain the £85K which is probably some slight confusion around VAT rules, where you have to be VAT registered with HMRC if your company turnover is likely to or has reached £85,000 turnover or more during any 12-month period.

In essence, you can become a Limited Company “whenever you want to” but it’s always best to talk through your situation with your Accountant beforehand so that guidance can be given as to whether this is the best decision for you at this time, factoring all the elements of your specific business situation.

Another question we’ve had raised is “why would I choose Limited Company status for my business?”  Ok well, there’s a number of reasons and probably the main one to think about is your position in the outside world and your credibility, especially since the recent pandemic where company standing is critical.  If you want to work with larger organisations, some of them won’t work with anything other than Limited Companies so your opportunities with them and your scope to work with other similar scale organisations increases as a Limited Company.  In addition, if you are looking to expand and borrow monies to fund that growth, you’re not depending on your personal credit rating for borrowing and as the company is a separate legal entity, all of your assets, such as your home can’t be taken away.  Secondly, claimable business expenses can be greater including areas such as mileage allowance, business trips and mobile phones and as a Ltd company director, any expenses claimed are deducted from the company profits and are not subject to tax.

Another very relevant area of consideration is that as a Limited Company Director you pay yourself via dividends and usually a smaller salary which can minimise the amount of tax and National Insurance that that you pay on your earnings.  Although the company will have to pay Corporation Tax on company profits (this is currently at 19%).  Most comparison tables showing the same income for a Sole Trader and Limited Company Director on the face of it look weighted against moving towards Limited status, but if you’re weighing up your options you should speak with your Accountant who can provide you with full details on how this would stack up for your particular scenario as it’s not just about the figures.

Being Limited requires more responsibility and more procedures to follow and usually increased costs and paperwork as businesses have to be more transparent with their paperwork, but this is where we come in.  We assess a client’s business, their business, their order book – current and future, their business situation and only then do we advise whether becoming a Limited Company will be beneficial or not.