Mr Brown has taken the benefits of being a small Ltd company away. Last tax year you were able to have the first £10k profit taken as a dividend tax-free. However this relief has now been withdrawn. You can still make many tax advantages by being limited however to do this you will need to pay yourself a small wage of say £500.00 per month and then take any profits out as dividends, profit (dividends) incurring a lower rate of tax and NI.
However you will need to set up payroll to pay yourself with PAYE and will need to take advantages of the tax benefits allowed as a director. You will need a decent accountant to administer all this and the accounting you will have to do to companies house and Inland Revenue. This will double or triple your accountant’s bill. Until you know what level of income you are likely to be achieving then you will have no way of knowing which is the best option for you.
Another point is that you can only take money out of a limited company when you have made a profit otherwise it is treated as earnings and taxed accordingly. Taking money from a limited company that you know is not in profit can also get you in trouble with IR and companies house. You can get around this by taking money as an interest free loan however even this is taxed, as it is a benefit in kind. Also every time you take a dividend out you will need a dividend voucher made up and minutes of a board meeting done.
The other major benefit of being limited is you have limited liability, the company has liability equal to its share capital usually £1.00 for small limited companies. Therefore if you were sued by someone for burning their house down then the company would fold and you would lose all assets held in the company and your share capital whilst keeping you personally held assets such as your home etc. This doesn’t mean you would get away free as you would have still have a liability as a director and would probably be fined as a director by the health and safety. Bit of an extreme example.
Also as mentioned in the posts above if the company went bust your creditors would be limited to taking the share capital and business assets, protecting your own assets held personally. However it is hard to get long-term business credit as a new limited company and any credit will normally have to be personally underwritten by you. So this benefit will not really help you.
In a nutshell it is easier to administer a sole trader then a limited company. If you are just setting up as a sole trader then all you need to do is register as self employed with the inland revenue (you can do this online) and set up direct debit to pay your class 2 national insurance contributions. Keep all your receipts and invoices together until April ’07. Until which time you will have a chance to go and see a few accountants. Most will not charge for an initial 1 hour consultation during which they will explain the above and more. Decide on an accountant and find out how he or she want the books kept, they will probably give you a free Excel template to do this. You then do your own books and will only need an accountant at the end of the tax year to do your return, if the books were kept well by yourself then you should only expect to pay around £200-400 for the return. Compared to around £1500.00 to properly administer and account for a limited company.
Use the money saved to get some really good indemnity and liability insurance.
Registering as self-employed forms
http://www.hmrc.gov.uk/startingup/register.htmHope this helps