Forming a limited company is a big step for any freelancer, contractor or small business owner. Some businesses are born as a limited company, others begin life as a sole trader before making the transition at a later date.
In a recent feature in The Journalist, Crunch MD Darren Fell was asked his views on the benefits of forming a limited company. Ultimately, it all comes down to timing, and the potential tax-savings you can make:
“The main issue is that sole traders effectively pay tax on every pound earned unlike limited companies. As an example, at £25,000 you can save up to around £1,300 and at £40,000 as much as £2,400 in tax and National Insurance contributions.”
As this example demonstrates, the tax savings you can make with a limited company are significant; so why do so many hesitate in making the switch?
One of the biggest concerns is that running a limited company can leave you with a much bigger administrative burden, meaning more time being spent on your accounting and less time doing the things that you want to do. Another issue, is the actual costs of hiring an accountant, which in some cases can outweigh the amount of tax you’re actually saving.
Both of these scenarios can be effectively solved with the right accounting solution.
In the 21st Century, running a limited company should not be a burden or a false economy. It’s for this reason that Crunch was formed in the first place: by combining online technology with real accountants on the end of a phone, accounting should be a breeze.
The online technology enables customers to access their financial data as and when they need to, and allows them to automatically draw up invoices (automatically calculating VAT in the process) and add expenses within their system. A dedicated account manager is then on hand to take care of any problems and guide them through the various accounting processes should they need any help. For any more complex tax advice, the Crunch accountants are on hand at no extra charge. All this is provided over the phone and for those worried about their phone bills, Crunch is always happy to call back.
So, how does this make it easier?
With a traditional accountant, you have to manually gather up any relevant financial information and receipts etc, and send it over to the accountant. This can waste a lot of precious time and also leaves the accountant with more work at the other end, meaning higher fees. By utilising online technology, which automates many of these processes, costs can be dramatically reduced.
Remember, with a traditional accountant, you don’t have real-time access to the financial health of your business. If you want to know the state of your business finances, you have to make a specific request of your accountant, who will probably charge extra for the privilege.
Ultimately, it’s a real shame that business owners are put off going limited simply because of the hassle it might create, and this, ultimately, is due to a lack of consistency across the accounting industry.
When is the time right to form a limited company?
Answer: When you’re earning enough to make significant savings and when you can find a suitable all-purpose accountancy service which makes the whole process easy.