The pros and cons of forming a Company

Pros and cons of company formation

If you’ve been a sole trader or self-employed for a while, you might wonder whether it’s worth setting up a company of your own. Forming a limited company isn’t without its complications, and it’s not always the best choice for everyone – but on the other hand there are some advantages which can be particularly useful to people working in certain fields.

Whatever you decide, it’s certainly worth weighing up the pros and cons of each if you intend to continue with your current career. Too many self-employed people stave off looking into company formation because of it’s perceived to be a complicated and expensive process, but this isn’t necessarily true: and you could be missing out on the benefits of operating as a limited company.

 

The Pros

Forming a company essentially means you’re creating a separate legal entity for the work you do. This might sound a bit technical, but all it really means is that any debts, liabilities or lawsuits arising from your work will usually be directed at the company, rather than you personally. This means your personal possessions (including your house) will not be not at risk if your company is sued or gets into serious debt: your liability is limited to the money you’ve invested in the business.

For many traders and self-employed people, this is the most important reason to form a limited company. If you’ve just started working, you may not have been exposed to many high risks or costs yet, but as you handle increasingly bigger jobs the risks can become greater – you could be sued for failing to fulfil a contract, or suffer losses that you can’t afford, potentially putting your personal assets on the line.

Another good reason to trade as a company is the tax advantages. Sole traders usually carry a higher tax burden than companies, and have less room to manoeuvre when it comes to reducing what they pay. Companies can be much more tax-efficient (particularly if you have a good accountant) and allow you to plan your earnings to your advantage. For instance, if your company makes £60,000 in one year, you can pay yourself £40,000 and leave the rest in the business, meaning you stay under the high-earner tax threshold and start the year with a healthy balance sheet.

Finally, trading as a company adds to your business’ authority and may make you a more attractive candidate when pitching for new business or funding from lenders. This really depends on the field you work in – in some sectors you may find your clients and suppliers will only work with limited companies, while in others it’s less of an issue – but be aware that you may be losing business by acting as a sole trader.

 

The Cons

Forming a company requires some preparation in itself, and may cost you some money at the outset – although there are services that will guide you through the process. And while the red tape involved with trading as a company isn’t as great a leap from self-employment as you may think, there is certainly more paperwork to take care of.

You will need to file accounts at Companies House every year (which will be available to the public), as well as filing accounts, corporation tax and company tax calculations with HM Revenue & Customs. If you’re adept at accountancy you may handle this yourself, but this is time-consuming and you may find you need to employ a professional – which means more expense. The same goes for your company’s legal responsibilities, which usually need to be handled by a solicitor.

Although you will not be personally liable for your company’s debts, you will have to meet certain legal obligations as a director, and can be fined if you do not. This means you have somewhat less freedom over the running of the business than you would as a sole trader: in particular, the law states that all decisions you make must be for the benefit of the company, rather than yourself. This can be a tricky semantic position when you’re the sole employee, and if you decide to sell shares to increase company funds, your power as a manager will be diluted further.

 

Still unsure?

 

If you are considering starting a limited company, get as much information as you can about the process beforehand and be sure you understand the obligations as well as the advantages. Companies House and HM Revenue and Customs provide some useful information on the topic if you need more information.

Author:

I’m Mary Cummings, a ghostwriter, collaborator and all round word doctor. I help business owners write and publish business books; I'm also passionate about helping creative freelancers find work that they love - their work sweet spot with work on their terms, projects they love and clients who are a dream to work for.