We are often asked “Should I form a limited company?” The answer depends on the business, its anticipated rate of growth and the degree of commercial risk.

In the early years of running a business, the privacy of operating as a sole trader or partnership can prove more beneficial. There may also be tax advantages in starting as a sole trader or partnership and incorporating into a limited company after a few years.

Whilst taxation on limited companies is lower than that of sole traders or partnerships, any monies taken by the directors must go through the PAYE scheme and hence taxed. This can be negated to some extend by reducing the director’s salary and opting to vote a dividend, but dividends have to follow the shareholding.

Benefits in kind are much tighter for limited companies, especially the provision of company cars. As a sole trader or partnership, the owner or partner will probably pay no direct tax on company cars. A director of a limited company will usually be taxed on both the benefit of the car and the fuel used in the car.

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For more information about the advantages and disadvantages of incorporation please contact us.