How can you limit your liabilities and keep more of your business profits?

One option for business is to operate through a limited company. This will provide access to a number of tax planning strategies, and also provide the benefit of limited liability status. Although there is a certain status in operating as a limited company you will lose some of your privacy, as annual accounts and certain company details have to be filed with Companies House, and these are open to public scrutiny.

A limited company is a distinct legal entity that is able to enter into contracts in it's own name. This is important as it means that all the company's liabilities are the responsibility of the company - not the directors and shareholders. The only exception is if you, as director of the company, offer a bank or other creditor a personal guarantee to repay the company's debt, if the company cannot.

So what are the advantages and disadvantages of incorporating your business?

Advantages:

1. Limited liability status - can protect your personal assets from business creditors if for any reason the company has to cease trading and cannot pay all its debts. This protection is especially useful if there are significant risks associated with your business activity.

2.  The owners of the company can receive dividends, which are not subject to National Insurance like wages are

Disadvantages:

1. Possible double taxation - as the company pays its own tax on profits and gains, it can only distribute what is left, the retained profits, to directors and shareholders. This can give rise to tax being paid both by the company and by the directors or shareholders when they withdraw the taxed profits from the company. 

2. More cost - the professional costs in setting up, preparing accounts and tax returns for companies can be higher than those you would expect to pay if you were a sole trader. Additionally, there are costs in complying with Companies House filing requirements.