Limited Company

[Pezza832]

Hello there!

I wonder if anyone can give me some advice on the benefits of becoming a limited company? I am currently sole-trading with a turnover of about £50k, profit about £40k. I wonder if it's worthwhile becoming a Ltd Co?

Could someone explain dividends and why I wouldn't have to pay NIC...

Thank you for any help you can provide...

Dave

 

[filtee]

The main benefit is that it seperates you from the company. It becomes its own entity. Meaning that if you ever got into financial difficulties, debtors/baillifs could not come and take your house if it was the company that owed the money.
Dividends are one off payments that are a % off your companys profits.

 

[Paul_Rosser]

In addition to the limited liability, If you were to setup a limited company you would be able to take money out of the company via dividends rather than salary.

Dividends do not attract NI and are paid from profit after corporation tax is taken into account.

Assuming this is your only source of income and based on your figure of 40k profit, you would pay yourself around £8k as normal salary which would keep you under your personal limit, so you wouldn't have to pay tax or NI on this.

Then with the remaining £32k you would pay £6400 Corporation tax (20%) and then pay yourself £25,600 as a dividend which would not attract any additional tax or NI.

So your take home would be £33,600.

You don't have to pay dividends all in one go and could pay them every month or quarter, but they have to be taken out of profit once you account for any Corporation Tax. *

If your profit goes up then you may have to pay additional tax on dividends, but it still usually works out better than paying income tax and ni.

*Opinion on paying mothly dividends can be divided as some accountants I spoke to said this isn't allowed and some say it's fine. The rules seem to say provided you fill in the correct paperwork then monthly dividends are fine.

 

[Pezza832]

Thanks guys...

Right, so plenty of benefits there. Will me changing the company over mean a brand new company? i.e. does this mean that West Midlands Distribution Ltd is a new starter or that I will be in my fourth year of trading (as it currently is as a sole trader)? I need to start to keep on top of things as my current account and business account have just got completely muddled up with trying to find a deposit for a mortgage so I've just been bunging the lot into the deposit fund. Thankfully we got the mortgage but now I need to tidy up this mess and start a-fresh!

 

[Paul_Rosser]

The limited company starts when you register it.

As the limited company and you are seperate legal entites you need to ensure the business and your money are kept seperately. Open a business bank account and only use that for business transactions.

You should also get an accountant as they will advise you on what records to keep in order for them to file both your company and personal tax returns.

 

[Pezza832]

I have a business bank account but I guess will start it from zero when I start trading and will go about it from there. I think an accountant is a must!

 

[Stewmoney]

As I understand it, you might want to get some advice about capital gains tax liability moving from private to LTD. The tax can be deferred, but depending on how you see your business developing in future, it may be relevant to you.

 

[Paul_Rosser]

You may also be able to sell any assets to the limited company, so best to speak with an accountant who can advise you on the best way to move from sole trader to ltd.

 

[daniel.mobbs@salixaccount]

'Selling' your business to the company would be a good idea. Speak to an accountant, or see my website as I have a blog on the subject.
In a nutshell; you have a Capital Gains Tax 'personal allowance' called an Annual Exemption of £10,600, so you could 'sell' you business to make use of a tax free creation of goodwill in the business which means the first £10,000 of cash/earnings you draw from the business would be tax free, but corporation tax would still be chargeable on the business profits at 20%. Cheap considering the advantages of saving NI by voting dividends.