Many people jump from having a self-employed business to a Limited Company without actually needing to, others make the change too soon and some change to a Limited Company and then make a few typical startup errors like so many others. So I thought I’d write a quick blog just outlining my top 5 mistakes or ‘misconceptions’ you can make when deciding to turn your business into a Limited Company and how to avoid them.
Many of you coming from a self-employed business mentality will be very used to being able to dip in to your business bank account and take money as you please. What many people are unaware of is once you become a Limited Company you can no longer do this! There are legal boundaries that come with withdrawing money from a Limited Company, as a director you can only take money one of three (technically two) ways:
- Withdraw money through dividends which can only be taken from profits the company has made so these withdrawals can’t be taken casually as you used to from your self-employed business.
- Paying yourself a salary (as a ‘CEO’ or ‘Managing Director’ for example) which means you’ll have to set yourself up on PAYE which is a little more complicated than people first think and much more time consuming than just paying yourself whenever you had a payment come in as before.
- Taking money as a ‘Director Loan’ which involves a bit or ‘red tape’ and isn’t overly recommended since there are strict tax rules on this method, and remember it’s not simply taking money…it’s a loan so you will need to pay it back to the company!
Becoming VAT Registered
Many people make the mistake of thinking that once you turn your business into a Limited Company that you also have to become ‘VAT registered’. This is NOT true! You only need to become VAT registered once your turnover reaches (or is nearing) the VAT threshold (which is currently £85,000 as of 2017).
So if this isn’t the case then your Limited Company can just remain non VAT registered and you’ll continue to pay tax similarly as you would when you were a self-employed business.
Another common misconception is that many people think they need to change their self-employed business into a Limited Company in order to start employing staff, again this is not true!
This is an extremely common issue I’ve run into with many business clients: they want to start employing people and suddenly begin to panic and try to turn their self-employment business into a Limited Company when they really don’t need to. If you’re currently operating a self-employed business and want to employ people…then in the infamous words of Nike…Just do it! You honestly don’t need to setup a Ltd Company to employ staff, you just need to setup the employee(s) on PAYE with the HMRC and use a payroll method, then you’re ready to start employing staff – it’s as simple as that!
So just remember, if you’re happy with your self-employed business status as it currently stands but want to employ staff then you’re completely able to do so without turning into a Ltd Company.
Tax Returns and Paying Tax
This point is two-fold, firstly it relates to filling in your tax returns as a self-employed business compared to a Limited Company and the second point is the type of tax you then pay.
If you’ve been running a self-employed business then you’ll be used to filling in a yearly ‘Self-Assessment Tax Return’ which, upon completion, informs you of the ‘Income Tax’ you owe and you then pay this amount at year-end.
When turning into a Limited Company you will have to fill in a quarterly ‘Company Tax Return’, meaning you will need to complete and return these tax returns 4 times a year. It’s also worth noting these company tax returns require a little more detail than the typical self-assessment tax return. Upon completing these company returns you’ll then be informed of the ‘Corporation Tax’ that the company owes and you will either pay this in one lump at year-end OR if your profits are over £1.5 million then you’ll usually pay your tax in quarterly installments.
Using ‘Limited’ or ‘Ltd’ in your Company Name
Another common misconception is that once you become a Limited Company you immediately have to start using ‘Ltd’ or ‘Limited’ at the end of your name, again this is not true. If you’ve been running a self-employed business and are now changing to a Limited Company then it can seem quite exciting to add ‘Ltd’ or ‘Limited’ at the end of your company name, however it’s NOT a legal requirement and you can just continue operating under the same name if you’d like to.
The reason I mention this is because many people forget that changing your company name (even if it is just adding ‘Ltd’) can have large unforeseen impacts in regards to having to update logos, social media profiles, bank account names, HMRC details etc etc. So it’s always worth thinking if changing your business name is really worth it, in some cases it really is and for others it’s not a big deal and is simpler to just keep the same name.
They are my top 5 mistakes or misconceptions to watch out for when looking to turn your self-employed business into a Limited Company.