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Financial Implications and Cost of Setting Up a Limited Company

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  4. Financial Implications and Cost of Setting Up a Limited Company

We are often asked, how much does it cost to set up a limited company? The truth is that it can be much less than you imagine. There are however a few differences in the financial terms between working as a sole trader and a limited company. This includes the tax you need to pay, the cost of setting up a limited company. It also includes the ongoing management of your business and your own financial liability.

Tax issues

When it comes to tax, sole traders and limited companies are very different.

Self-employed tax

If you choose to set up as self-employed you will run your own business as an individual and both your business and personal taxes are treated as one. You must register with HMRC to complete a Self Assessment tax return every year and you will pay income tax and National Insurance on your profits.

Limited company tax

As a limited company, you have chosen to set your business up as a separate legal entity, distinct from yourself and the other shareholders and directors. Although the cost of setting up a limited company can be lower than you think (check out our formation packages), your tax responsibilities are different than being a sole trader.

Corporation Tax

You will need to put together statutory accounts for your business and send Companies House an annual return. You’ll also need to send HMRC a company tax return. This is so that Corporation Tax can be calculated on your business profits.

NICs as a director

As a director of a limited company, you’ll still need to complete a Self Assessment tax return every year. However, your tax and National Insurance contributions (NICs) will be taken through your company’s PAYE scheme. Any dividends that you receive will also be taxed. These will be calculated from the information you provide in your tax return.

Whether you have a sole trader business or a limited company you will also need to register your company for VAT if your takings are more than £81,000 in any one year.

Administration and the cost of setting up a limited company

Whether you’re setting up as self-employed or you’d prefer to start a limited company there isn’t a huge difference in cost. Using a formation agent can bring the cost of setting up a limited company to nearly nothing. With The Formations Company’s E-Formation package the cost of incorporating your company can actually cost less than if you were to go directly to Companies House.

The difference between self-employment and being a limited company

One of the big differences between being self-employed and running a limited company is the administrative obligations. In general, when you are running a limited company you have to complete more returns. However, many of the details you need to file for a limited company are details you also need to help make your sole trader business successful too.

As a limited company…

  • You will need to keep company records
  • Report any changes to Companies House and to HMRC
  • And to file an annual return and a copy of your company’s accounts. This makes sure they give a ‘true and fair view’ of its finances.

As a director of a limited company…

  • It is your obligation to try to make the company a success
  • To make decisions that are for the company’s benefit rather than your own
  • And to tell other shareholders if you might personally benefit from a company transaction.
  • You will also need to follow the rules laid down in the company articles of association.

For many businesses, whether limited companies, sole traders or business partnerships, these tasks, returns and communications are taken care of by an accountant. This means, other than ensuring that they happen, they are not a big trouble.

Your business and your personal liability

When you form a limited company you are, in effect, limiting your personal liability. This makes sure that if something goes wrong with the business, whether that’s debt or a claim has been made against your company, your personal assets and finances will not be at stake.

As a sole trader, or if you’re in a business partnership, this is not the case and you will be personally liable for your business.

Bringing the cost of setting up a limited company down

So, how much does it cost to set up a limited company? Not much money nor time. The Formations Company lays out each step in the process for you and your incorporation can take as little as 24 working hours to complete. You can also choose from a number of different packages, offering basic formations right through to helping you through your first board meeting, as well as the tools to support you during set up and beyond.

For further information head to our help centre.

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