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Hattersley Clark

FAQ 1: What are the advantages and disadvantages of a limited company?

Advantages

• a higher marketing profile than other businesses
• a separate legal entity with limited liability, therefore personal assets are at less risk, although banks and landlords may request personal guarantees
• shareholder directors can receive a package of low salary and higher dividend thereby reducing tax and national insurance for the individual and the company. Savings can vary from £1500 to £4600 per year compared with sole traders
• shareholdings can be spread between family members to spread dividends and reduce or eliminate higher rate tax
• companies with a turnover of less than £5.6million no longer require an audit, thus the cost of year end accounts is much closer to those of a sole trader

Disadvantages

• a company requires a minimum of two people involved - a director and a company secretary (who may also be a director)
• the directors may be at risk if the company trades whilst insolvent or fraudulently
• if the company provides the directors with a car, they will be subject to car and fuel benefit - this is usually costlier than a sole trader agreeing a private proportion of motoring costs
• there is a higher paperwork burden

The above information is provided prior to the decision in the Arctic Systems case. In this case, a company has been set up where the husband does the majority of the work, but receives a small salary, and sizeable dividends are split between husband and wife. HM Revenue & Customs are contesting that the husband should receive a salary suitable for the work done. If HM Revenue and Customs win this case, it is likely that a sole trader would have a lower tax liability.

The above information is provided with no responsibility on the part of Hattersley Clark Chartered Accountants, its employees or agents.