To incorporate or not?
In another blog we highlighted some of the points we discuss at our first meeting with a new business-owner. This blog will consider the first of the points we mentioned.
When you have decided to start your own business and you know what you are going to do, one of the next questions to consider is which trading vehicle to use. Are you going to be self-employed or will you incorporate the business as a limited company?
Some of the pros of being self-employed are:
- less bureaucracy,
- there can be less expenses,
- the tax treatment of cars can make it quite favourable to run a car through the business,
- if the profits are low there can be less overall tax to pay.
And some of the cons of being self-employed are:
- often existing businesses do not like trading with self-employed people – the gig economy can create confusion over whether you have worker’s rights and whether you are actually an employee or not.
- Depending on the profits of the business you could be paying more tax than you need to. The higher the profits the self-employed have the more tax they will pay when compared to a company and its owner.
- If the business fails you will be responsible for all the liabilities that are owed.
The Pros of trading via a limited company include:
- Businesses prefer to trade with a “proper” business that is incorporated.
- With higher profit levels overall less corporation tax, national insurance and income tax will be paid over to HM Revenue & Customs (HMRC) than a business that is self-employment.
- Limited liability: if the company fails (and assuming the insolvency is not due to illegal reasons) your liability to pay creditors is restricted to those to whom you have given a personal guarantee to.
The Cons of using a limited company include:
- Often it is not worth having a company car as too much tax is paid.
- There are more costs of compliance: Companies House, the Accountant etc
- The entrepreneur’s relationship with the company can become confusing as they can have multiple interactions: they are the owner, director, employee, creditor and often the landlord.
Aysgarth Chartered Accountants is an accountancy practice that specialises in start-ups and entrepreneurial SMEs. This blog is not intended to give advice, it merely introduces the subject and is not an exhaustive list of all the Pros and Cons of being self-employed or incorporating. If you would like to know more about establishing your own business we would love to discuss this in more detail with you at our Leeds office. Please get in touch.