Despite the lingering effects of the Great Recession, people are more optimistic about the general business climate in the country, even though much of the wealth being generated hasn't spread to the nation's poor or middle class. Despite that, over 27 percent of those polled think that economic conditions are excellent or good. Many people are using this improving economic market as an opportunity to start a new business. Whatever industry your intended startup is in, you should consider carefully what kind of corporate structure you are going to set up. There are many reasons to use a Limited Liability Corporation (LLC) for your startup, and here are five of the best.
Depending on how the company is established and how many employees/investors there will be, a small business startup often creates an LLC because this helps it avoid double taxation and can still support multiple classes of stock if needed. Double taxation usually occurs when an entrepreneur chooses a C-Corp business structure, so the company and the owner are both taxed separately in April. An LLC prevents this, as it is taxed more like a sole proprietorship. This can be especially useful if you are using a startup accelerator. You can always convert the LLC to a corporation through a fairly simple process later on.
Another main question is in which state you should establish your entity. Delaware has been at the forefront of incorporation and has low costs. The judges of the Delaware Court of Chancery are also usually pro-business. You'll find an increasing number of states are following Delaware's lead, in case you want to incorporate as an LLC closer to home. In all cases, you'll want to consult a professional who can help you with this, or even get help from online services like MyCorporation, Legalzoom or BizFilings.
The cost of setting up an LLC depends on what state you are setting it up in. Regardless of the cost, it usually makes sense to set it up in that state that you work in. For example, in New York many people think they can set up a Delaware or Nevada LLC to avoid paying New York State and New York City taxes. That's not true. If you operate in New York State at all, you are subject to their tax filing (and tax paying) requirements regardless of what state your LLC was formed in.
Prospective startups often ask "How will the IRS find me?" Opening a bank account in the state, having addresses on your website and business cards, or receiving mail that includes credit card bills or bank statements to an address in that state are all ways they will find you. It often ends up being more expensive to try to avoid certain state taxes. This is because not only do you have to pay all of the state and local taxes where you operate, but you also have to pay Delaware/Nevada franchise fees just for forming in their respective states.
Another benefit of the LLC structure to a startup is that once you have set it up, there's not a need for a lot of continual maintenance and, perhaps more importantly, it's easy to add new partners or sell interest in the entity to someone else. This is more relaxed than the C-Corp business structure, in which minutes are required for making board decisions. Generally, LLCs have fewer restrictions on many administrative items compared to other business structures.
Many startups create the LLC structure to protect their personal assets against lawsuits directed at the company. A sole proprietorship can be a risky entity to start. More risky is a general partnership. After a period of expansion and growth, many founders convert their LLCs to an S-Corp or C-Corp. This is because an LLC is limited in what it can do when it comes to acquisitions and mergers. LLCs tend to be adequate for businesses that are more in their beginning stages.
"An LLC is an ideal company structure for a startup because it is fast and simple. You can do the registration without an attorney," says Brett Hamilton, the founder of Simple.be. He goes on to note that in some states, such as his native Oregon, "the filing fee for an LLC is only $100. Once you've registered your LLC with the state, you can get an Employer ID Number (EIN) from the IRS, and get business bank accounts and business checks. Just that quickly, you are in business. The manager of the LLC (often the owner) has the authority to enter into contracts as the LLC. An inventor can also assign their patents to their LLC."
Something to keep in mind, according to Hamilton: you may find that the "hardest part of forming an LLC is picking the name, because it's one thing that is difficult to change later." He recommends choosing a name that is "short and abstract." Also keep in mind, as Hamilton points out, "the most well-known benefit to forming an LLC (versus doing business as a sole proprietorship) is that an LLC provides for separation between personal assets and company assets, and this allows for some legal protection."
Ultimately, though, make sure you get the advice of a legal professional before picking exactly which business structure you want.
With the world still in the midst of a pandemic and lockdown measures affecting countless individuals across the nation, many people are now taking this opportunity to start their own businesses.
Last year, there were about 2 million limited companies and that number is likely to grow in 2020. There are many advantages to being the owner of a limited company when you’re self-employed, so it’s often the preferred option instead of sole trading.
As limited company accountants, we’re discussing the benefits this type of operating structure offers, as well as when setting up a company is better than running your business as a sole trader.
We’ve previously written a guide on setting up a limited company, so you can be aware of what is required of you. Gorilla Accounting can also do this part of the process for you with our company formation services, so you don’t have to worry about doing the admin side of things.
But what exactly is a limited company and how does it differ from other types of business structure?
A limited company is a legal identity separate from its owners and managers, even if there is only one person involved in the company. The company also needs to file yearly accounts, a confirmation statement to Companies house, which are available to the public, and a corporation tax return.
The company can have contracts with individuals and other businesses and, should anything happen, from the company getting sued to the business going into debt, the directors and shareholders don’t have to sell their personal assets to make up for that.
The money that your company makes is also not available for you to take whenever you wish. As a sole trader, there is no separation of your personal and your business accounts, but the same isn’t true of limited companies. Money belongs to the company, not to its owner or any other individuals.
All self-employed individuals who are thinking about setting up a limited company should consider whether it’s the right choice for them. After all, there are more financial and admin responsibilities than with sole trading, so it can be a more complex and time-consuming process.
However, there is also no denying that owning a limited company offers many benefits, some of which are:
This is one of the main advantages of opting for a limited company. As we mentioned above, limited companies are separate legal entities, so you’re not personally liable for potential debts should anything happen. The only liability is to the value of shares the company owners purchased upon set up.
If you remain a sole trader, however, both you and your business are treated as a single entity when it comes to tax and admin purposed.
Another reason why people prefer to set up a limited company instead of trying their hand at sole trading is that it doesn’t cost a lot to get a company up and running. For only £12, you have access to a wealth of benefits, including tax advantages, that you wouldn’t have with any other type of business structure.
In addition to this, the process is also easy. There are no complex requirements to becoming a director, so anyone can do it.
Limited companies are tax-efficient too, especially when compared to sole trading, which is a big reason why they are so popular. After all, business owners will appreciate every opportunity to cut down the amount of tax they pay. Limited company directors can take a small salary and then take most of their income in the form of dividends, which means you can minimise how much you pay in National Insurance contributions.
Companies have to pay 19% corporation tax on profits while sole traders have to pay between 20 to 45% income tax on their profits. Setting up a limited company, therefore, allows you to take home more of your earnings.
If you’re no longer interested in running the company, the business can be handed to someone else. Whether you’ve decided to sell, or something happened that prevents the owner from carrying on participating in the company (such as an accident or death), it’s much easier to do a business transfer with a limited company than as a sole trader.
The company owns all assets in its name, from physical properties to equipment and money, so transferring ownership of everything to another person is easy.
As a limited company, your business can benefit from improved reputation and credibility. This is because this type of structure presents an image of professionalism and therefore helps people to trust and have confidence in your business.
It’s worth mentioning that large companies, especially those in sectors such as finance, prefer to work with limited companies instead of unincorporated businesses. You can be missing out on many opportunities by choosing to stay as a sole trader.
The preference towards limited companies is due to the fact that they are more strictly monitored and have accounting and reporting requirements that sole traders don’t have. In addition, because their information is publicly published, they are seen as transparent, which helps with their professional image.
All of this can help you to attract new investors, to expand into other markets, to create a brand identity that people trust, and more.
When you incorporate your business, you are offering its name a level of protection that it didn’t have as a sole trader. This is because names are registered at Companies House so, if you wish to trade under a specific name, becoming a limited company will ensure that no one else can use it.
If they do – or if they choose a similar name to yours – you can place an objection to it. The other company will have to change their name if Companies House agree it’s too similar. If you remain a sole trader, the name of your business can be registered and used by someone else.
You may think this is no big deal, but the truth is that it can hurt your business. Think about it; if there’s a company out there with the same exact name as your business (or even just similar), people can confuse the two of you. If they don’t have the greatest reputation, then your sole trader name will get associated with their company name, which will hurt your reputation.
Likewise, you also have to choose a unique name for your company to ensure that you’re not selecting something that already exists or that is too similar to the name of an existing company.
If you already have the perfect name for your company but you’re still not ready to start trading, you can set up a dormant company. This simply means that your business has no significant accounting transactions during the tax year. By doing this, you’re protecting the name for the future and giving yourself time to raise capital to develop the business.
In terms of admin, it’s easier to maintain a dormant company than an actively trading one, but you still need to keep up the necessary formalities. We’ve been providing accounting for contractors for many years, so we can help you with this if you’re unsure of what to do.
As a limited company owner, you have more financial opportunities than sole traders. For example, you are able to raise extra capital by selling shares in the business to people interested in investing in your company. In addition, if you’re looking for a bank loan, you have a higher chance of obtaining it if you’re a limited company.
This is tied to the fact that limited companies have better reputations due to their public records’ transparency; for example, it’s easy to see how much a company made during the last tax year.
Setting up a limited company instead of being employed by someone else allows you to have a greater degree of control over your career. You don’t have to answer to anyone, so you can make all the business decisions you want. As the boss, you also have more freedom in your personal life.
Your work-life balance can improve a lot too, especially if you take care of your mental wellbeing, whether or not you work alone. When possible, take a few days off, go on holiday or take more breaks during the day – it’s up to you.
Limited companies can claim certain expenses, from software and internet costs to travel and office equipment. The same can’t be said for sole traders. So, it can be a lot more efficient to run your business as a company owner; if you’re unsure if self-employment is for you or you’re still not making a lot of money to justify incorporating your business, it may be better to work as a sole trader while you figure that out.
Instead of making pension contributions out of taxed income as an employee of your limited company, the company itself can make pension contributions. These contributions are usually tax-deductible too, so you may get corporation tax relief against its value. It’s always better to consult a professional accountant to ensure that you’re doing everything right.
At Gorilla Accounting, we pride ourselves in only providing the best services, and this is true of FreeAgent accounting software. When you become a client, you get 24/7 access to this invaluable tool, which can make your life as a limited company owner a lot easier.
Used by more than 60,000 freelancers, contractors and small businesses, you can run your company from anywhere in the country or world – for instance, send invoices, keep on top of your taxes, check your cashflow, and so much more.
You can do this from any device too, including your phone, laptop and tablet, which means that, if you lead a busy life, you can simply check your financials on the go.
And, if you have any questions, we guarantee a same-day reply if you enquire before 3pm.
Of course, despite the many advantages of limited companies, it’s also important to keep in mind that you have a lot more admin tasks and documents to fill out and submit than you did as a sole trader. But we can take the work off your hands and share the administrative burden here at Gorilla Accounting.
As contractor accountants, we’ve helped many self-employed individuals handle their accounts, which allowed them to focus on their business instead of pouring time and effort into learning the ins and outs of the complicated UK tax system.
Contact us today to learn more about how we can help your business – and how to help it become more tax-efficient – and check out our contractor tax calculator to help you figure out your take-home pay.
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