Perhaps your business is growing, you're taking on more clients, or you've been told that "going limited" is the next step.
But before you register a company, it's worth taking a step back.
A limited company can be the right choice for some businesses, but it isn't automatically the best option for everyone.
Here are some questions to ask first.
1. Why do you want to become a limited company?
This is probably the most important question.
Are you considering it because:
Your business is growing?
You're making more profit?
You want to take on employees?
You want to work with larger clients?
You've been told you'll pay less tax?
You want to protect yourself from certain business liabilities?
You think it looks more professional?
There can be good reasons to incorporate, but "someone told me it's better for tax" isn't enough on its own.
Your business structure should fit your circumstances and your plans.
2. How much profit is your business actually making?
If you're currently a sole trader, it's useful to understand your actual business profit before deciding whether to incorporate.
Don't just look at turnover.
A business turning over £100,000 isn't necessarily more profitable than one turning over £60,000.
Your costs, profit and how much money you need to take from the business all matter when considering whether a limited company could work for you.
3. Do you understand the difference between the company and you?
This is one of the biggest changes when moving from being a sole trader to operating through a limited company.
A limited company is a separate legal entity.
That means the company's money isn't simply your personal money.
If you have £20,000 sitting in the company bank account, that doesn't mean you can simply transfer £20,000 to your personal account whenever you want.
Money generally needs to be taken from the company in an appropriate way, such as salary or dividends, depending on the circumstances.
This is something you'll need to get used to if you've previously been a sole trader.
4. Are you prepared for the extra administration?
A limited company can bring additional responsibilities.
You'll need to think about things such as:
Keeping proper company records
Filing company accounts
Corporation Tax
Confirmation statements
Keeping Companies House information up to date
Director responsibilities
Payroll, if you pay yourself a salary or employ people
Keeping personal and company finances separate
It doesn't have to be difficult — particularly if you have an accountant helping you — but it is more administration than many sole traders expect.
5. How much money do you actually need to take out of the business?
This is an important one.
If you're planning to take almost all of your business profits out to fund your personal living costs, the tax and cash-flow position may look very different from someone who plans to leave money in the company to reinvest or grow.
Think about:
How much do I need personally each month?
How much does the business need to keep operating?
Do I want to leave money in the company for future growth?
These questions can all affect whether incorporation makes sense.
6. Are you prepared for the responsibilities of being a director?
Being a director isn't just a title.
Directors have legal responsibilities, including making sure the company keeps proper records, files information when required and operates appropriately.
You don't need to know everything yourself — that's what professional advice is for — but you should understand that running a limited company comes with responsibilities.
7. Have you considered what happens if the business grows?
Think beyond today.
Where do you want the business to be in the next few years?
Perhaps you want to:
Employ a team
Take on larger contracts
Bring in another shareholder
Invest in premises or equipment
Retain profits to fund growth
Eventually sell the business
Your plans for the future can be just as important as your current figures.
8. Have you spoken to an accountant before making the decision?
This is one decision where getting advice before you set up the company can be much more useful than asking for help afterwards.
An accountant can look at your individual circumstances, including your profits, personal income requirements and plans for the business, and explain the potential advantages and disadvantages.
And importantly, they can help you understand the numbers without drowning you in jargon.
So, should you become a limited company?
Maybe. Maybe not.
There isn't a magic profit figure where every business should automatically become a limited company.
For some business owners, incorporation may make sense.
For others, remaining a sole trader may be simpler and more appropriate.
The right decision depends on your business, your numbers and your plans.
And if you're considering making the change, it's worth getting advice before you register the company rather than trying to work it all out afterwards.
Thinking of going limited?
At Soldi Partners Accounting, we help small business owners understand their options and make decisions based on their individual circumstances — without the jargon.
If you're thinking about setting up a limited company, talk to us before you make the move.
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