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When is the right time to form a Limited Company?

Whether you work as a sole trader or contract via a limited company, each option has its pros and cons. The typical scenario is for someone to start contracting or freelancing as a sole trader for its ease of set-up and small administrative burden.


After increasing their earnings, they may then consider forming a limited company to lower their tax paying responsibilities and increase their attractiveness to potential clients.


This raises the question: when is a good time to form a limited company? And how substantial is the culture shift as you move from one business structure to another?


The common consensus is that for while your earnings remain low it’s best to remain as a sole trader. As a low-earner your tax and accounting responsibilities will be very simple – simple enough to do it yourself. The problem of going limited is that you’ll need an accountant to look after your accounts, and if they’re charging high fees then the associated tax savings may be wiped out.


As an example of money savings possible with a limited company: at £25,000 you can save around £1,300 in tax and National Insurance contributions; and at £40,000 as much as £2,400. So the savings can get substantial very quickly, but keep in mind, you have to deduct an accountants fees to discover the truer value it represents.


The importance of a good accounting set-up


What this emphasises is the key role that the accountant plays in ensuring the value of a limited company set up. Traditionally, one of the aspects of a limited company which disuades people is the perceived hassle that running one ensues. Many is the contractor with an accountancy horror story. However, with advances in computer technology there is no longer an excuse for limited company accounts to be overly time consuming. For example, online technology can be utilised to enable automatic invoice processing, automatic VAT calculations (should you decide to be VAT registered) and expense management.


It seems only natural for freelancers and contractors working in online industries, to be able to maintain and check their business accounts online in the cloud. It seems to me archaic that anyone should have to keep track of their accounts via paper receipts and invoices, and information that needs to be sent physically back and forth between a contractor and their accountant. Not to mention being unable to see the health of your business unless you specifically ask for a presentation of your accounts (which will probably cost for the privilege).


In situations such as the above, running a limited company is an unwelcome burden which all freelancers and contractors could do without.


Suggestions for an ideal model


The ideal model is an all-in-one accounting solution which enables you to input data via an online interface, while having access to the advice of qualified accountants as and when you need it. Such packages do exist by the way, but check the small print because some online accounting services are advertised as being supported by accountants without actually providing you with the services of an accountant. It simply means that accountants can access it and use it if you give them the appropriate codes – i.e. go away and hire an accountant separately!


Another danger with accountants are the costs. They vary greatly within the bean counting industry and whilst some promise low rates, it’s the hidden costs and added extras that can add up. For example, if you phone them up for advice, will they charge by the minute? Are there any extra filing charges? Do they charge on the presentation of your accounts?


Because of the discrepancy in the levels of service available, many small businesses are put off from going limited. Why form a limited company if there’s no guarantee of getting the level of service you need? It’s a real shame if people are missing out on tax-savings because of the inadequacy of service providers. However, owning a limited company is not just about saving money, it’s also an issue of financial security and the ability to separate the financial health of your business from that of your personal possessions and liabilities.


So, a good time to form a limited company is when you can be guaranteed of tax savings and know that you have a found an accountant who will look after everything without charging you through the roof for the privilege.

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