With the tax structure we are currently experiencing in 2003/2004 there are, in many instances, tax savings to be enjoyed by sole-traders changing the status of their business to limited company.

Before you join the rush to incorporate you should think carefully about whether it is appropriate for you.

Operating as a limited company can bring a number of benefits, such as improved credibility with other trading parties and importantly you are no longer personally liable for debts that the company may incur. 

For many, the idea of tax savings may drive the decision. Such savings may, of course, be temporary and could feasibly reverse at the next Budget. 

Being a director of a company means you have new legal and administrative responsibilities. As a sole-trader you would be used to drawing money when it suited you in order to meet personal needs. As the  company is a separate legal entity the funds in the bank account belong to the company, not you, and there are restrictions upon how you can use it. 

The legal responsibilities attached to directorships should not be taken lightly, as a breach could result in criminal proceedings. You will have to comply with the requirements of Companies House in addition to those of the Inland Revenue and Customs and Excise. 

You will be required to make additional declarations to the Inland Revenue for expenses you have incurred on company business and may be penalised for getting it wrong! In addition to an increased administrative burden the small limited company understandably incurs higher professional fees in order to ensure compliance with statutory regulations. Remember, you will also be an employee and operate under the PAYE scheme which may require regular deductions from your salary and payments to Inland Revenue and tax year-end submissions. 

With limited liability comes the loss of privacy as your accounts filed with Companies House will be on public record.  

We believe that if the culture of the small business can embrace the extra demands then a successful  move to limited company status can be achieved and the well-publicised tax advantages enjoyed.  Incorporation solely for the expected tax savings is more difficult to justify.

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