‘Incorporation’ is the process of settng up an organisation that is seen as a legal entity in itself. The organisation is then known as a limited company. As a sole trader, there’s little distinction between you the person and you the business – at least when it comes to money.
The most obvious difference between the two company status types is that, as a limited company, you have limited liability. That’s to say your personal possessions (‘assets’) are guarded against commercial risk (the failure of your business). And while you might not be planning on going bankrupt any time soon, this is realistically a very important factor for many business owners.
But there are other potential benefits, too. Historically, you’d probably have needed an annual profit in excess of £50k to have seen the tax benefits of incorporating. But nowadays there’s more potential to reduce your tax payments even with relatively modest profits.
These tax breaks relate to your National Insurance Contributions. If you form a limited company, you can pay ‘dividends’ to shareholders (for example, yourself) from your profits before paying any National Insurance tax on it – and just pay yourself a minimal salary. As dividends are treated differently to salaries, this protects a degree of your profit from National Insurance tax.
There’s often an enhanced perceived status that comes with being a limited company – even if it’s purely from the three letters ‘LTD’ at the end of your company name.
Finally – and often relevant to freelancers and small businesses – clients often find it preferable to do business with limited companies. Their administrative departments can often be geared towards working with companies with a limited status – sometimes to the point where sole traders and partnerships can miss out on work.
If you’re unsure which company status is right for you, get in touch for a chat about you, your business, and your future plans, and we’ll be able to point you safely in the right direction.