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To Form a Limited Company or Not?

Forming a Limited Company – the pros and the cons

We have had a couple of new clients into our Stirling office recently where the issue of whether or not they should have been incorporated into limited companies has become a thorny question. In both cases they had received, in my opinion, some poor tax advice on whether or not to form a limited company.

Let’s take our first client. She had started up on her own – baking specialty cakes in the Falkirk area – first as a hobby but now intent on taking it further. She had been advised by her previous tax accountant to form a limited company but her business plan was for her business to grow slowly and to barely break even in the first few years as she invested in her business. By becoming incorporated too early she had acquired an unnecessary level of complexity without any noticeable benefit. By being incorporated she was prevented from submitting her accounts and tax herself – as companies must submit corporation tax and accounts electronically – forcing her to use the services of an accountant with the relevant software. In her case, self employment would have been the best bet while the business was still in its “micro business” state.

Tax Advisor to a budding Alloa Internet Tycoon

Our second client was based in Alloa and ran an internet business selling through eBay. The business was growing rapidly and had been profitable for some time, but was being done on a part time basis with the owner also holding down a full time job. She still ran the business as self employed. She was saving the profits from her eBay business as she lived off her earnings from employment.. She was therefore somewhat surprised and annoyed when she was told that she was paying 40% tax on most of her internet profits. Here was a case where incorporation through forming a limited company should have been done much earlier. She could afford the additional costs of engaging a tax advisor – costs which would have been more than offset by the tax savings within a limited company structure.

An Accountant who understands small business needs

Clearly for every client, circumstances will differ, however getting sound advice from a trusted source such as a Chartered Accountant who understands small business needs, might just minimise the risk of making a poor decision.

For friendly professional advice from a Chartered Accountant in the Stirling or Falkirk area contact D & A Pearston.

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