Myths about running a Limited Company

When you’re starting a business, you’ll need to make some important decisions about how you’re going to set it up. Sole trader, limited company & partnership are all common types of business structure but do you really know the ins and outs of the different types?

A limited company can offer protection against personal liability but comes with more responsibilities, especially in terms of record-keeping and filing tax returns.

As an accountant, I hear lots of myths being flung around about Limited companies so let’s debunk a few below.

Myth: You have to be VAT registered to be a limited company. 

WRONG – you can be a limited company and not have a VAT registration!

More about VAT

VAT (Value Added Tax) is a tax that you pay on the goods and services you buy. In the UK, the standard rate of VAT is currently 20%. 

You can only charge or claim VAT if you are VAT registered with HMRC. The threshold by which you HAVE to register for VAT is if your turnover is over £85k. This applies to all businesses regardless of whether they are a limited company, sole trader or partnership.

Myth: You have to start a limited company to run your own business. 

Definitely not – you can start a business without starting a limited company by being either in a partnership or running the business as a sole trader. 

In fact, when you’re starting out it can be better to set up as a sole trader to keep costs like accountancy fees down in the first couple of years.

The complexity involved in running a Limited Company revolves around things like keeping companies house up to date with all the company information including annual accounts. 

However limited companies can be a good option for a start-up if you want to keep the company separate from your personal finances plus they have some good tax benefits depending on your other circumstances.

Myth: The tax rules for limited companies and sole traders are the same.

Nope – there are lots of differences in taxes between sole traders and limited companies. For example, a mobile phone bill can be an allowable expense for a limited company but as a sole trader, only the business proportion is allowable!

Another difference is that limited companies can pay dividends to shareholders, which isn’t possible for sole traders. Dividends are an alternative way of taking money out of a limited company & they come with an extra tax-free band. This option provides more flexibility in how you want to pay yourself or invest some money back into the business. 

Now you can tell the difference between the facts & myths, you’ll be better equipped to make decisions about your business structure. Limited Companies are a great option for anyone who wants to be their own boss, but doesn’t want to go down the Sole Trader route.

If you want to ask any questions about Limited Companies or get started on setting one up for yourself, then please book a power hour and we can decide the best route for your business.