“With the much reduced dividend allowance coming in from April 2018, does it still make sense to form a limited company or should I continue to operate as a sole-trader?”
This is a question I get asked all the time and the answer, unfortunately, is “it depends”.
Forming a limited company can often be driven by a number of factors, not just tax savings and not every business owners’ reasons are the same. The top five reasons for incorporation (another name for forming a limited company) are:
1. Personal asset protection. Limited Companies allow owners to separate and protect their personal assets. In a properly structured and managed Limited Company, owners should have limited liability for business debts and obligations. This means that the creditors of the business can’t seize your personal assets (like your home, car or savings) in the event that the business fails. This is therefore very attractive for some owners who don’t want to risk their own homes in unforeseen events.
2. Additional credibility and name protection. Adding “Limited” after your business name can add instant legitimacy and authority. Consumers, suppliers, and partners frequently prefer to do business with an incorporated company and in fact, some businesses will only work with other Companies in order to protect themselves from the latest IR35 (disguised employment law where the client would be required to deduct tax at source for contractors and sole- traders) legislation.
Other businesses may not form another Company or use a trade name that is the same as your corporate name. This benefits the business legally and helps in brand-building and marketing.
3. Perpetual existence. Limited Companies can continue to exist even if ownership or management changes. Sole -traders and partnerships just end if an owner dies or leaves the business. This makes Companies a good vehicle for selling once you reach retirement, or to pass onto the next generation.
4. Tax flexibility. A Company is taxed at 20% whilst a sole-trader is taxed at 20%, then 40% and 45%. However, it is important to do the calculations carefully for each individual circumstance as sole-traders get access to a personal allowance (currently £11,500) and any profits which get passed through the company to the owner may get a double-tax charge.
5. Deductible expenses. Companies may deduct normal business expenses, including salaries, before they allocate income to owners and there is a wider variety of deductible expenses which Companies are afforded to reduce their taxable profit.