When choosing your business structure, there is no “perfect” solution that can be recommended upfront. Your company’s structure depends on many factors, business and personal, which add up to the right, unique choice.
Factors that you will consider include future plans for growth, current profit margins, current and project tax threshold, the need for business partners, venture capital considerations, and professional image.
To put yourself in a position of strength to debate the advantages and disadvantages of becoming a PLC, we recommend that you work with an accountant and business consultant to draw up assessment strategies. Using professional specialists will clarify things and remove any confusion. By working through the decision in this way, you can be sure that you have made the right choice and will not be undoing things in the future.
Other professionals that can assist you are formation agents and a tax adviser.
Advantages of a private limited company structure
The leading advantages of a PLC are tax and financial liabilities.
Risk and liability – A PLC is a legal entity in its own right, the business is created and registered as a separate legal entity, and it is, therefore, separated from you personally. This allows you, the business owner, to keep your assets separate from the business itself.
This big benefit means that you will not be subject to any personal liability, as their work is undertaken as an agent for the company rather than as an individual. You will not be held liable, in your personal capacity, for any business debts or legal actions. If you were a sole trader, all the business debt would automatically be your personal debt and vice versa.
If your business runs into difficulties, debtors could target your personal assets if you are a sole trader. As a PLC, your personal assets will be protected by a “corporate veil”, whether it’s debt, losses, or legal claims – it will remain the responsibility of the company and the directors’, i.e. you, are protected.
Should there be a financial failure within the company, your liability will be limited to the value of the unpaid dividends on your shares.
It is important to note, however, that signing a director’s personal guarantee on a loan, lease or contract, is a personal commitment. If the company is unable to pay, the debt collection will be made against you personally. Loans for business vehicles or equipment, a credit line, or a commercial lease are examples of when a director’s personal guarantee might be called for.
If legal disputes do arise, the company can activate its insurance coverage or be sued if not covered. It is difficult, and indeed rare, for a director to be sued personally for a company’s wrongdoing under UK law.
Corporation tax – Tax is the other advantage of becoming a PLC – specifically corporation tax versus personal income tax. A PLC will pay corporation tax on any profits, but this will be at a fixed rate. As a sole trader, your tax rate will fluctuate in line with your income levels, and you will be susceptible to much higher rates of income tax under the personal income sliding scale.
PLCs will currently pay 19% Corporation Tax on profits, and a sole trader can expect to pay from twenty to forty-five percent Income Tax on profits.
A company gets full capital allowances on motor vehicles even if employees use them for personal needs. A car benefit can be made more cost-effective by the strategic selection of list prices and CO2 emissions of the vehicle.
Computer equipment and expenses can be provided to you tax-free if it is a requirement of your work.
Income tax – All available profits are not deemed to be personal income each year (sole trader), but a portion can be retained within the business as capital building for future operational growth and costs. In addition, in a PLC structure, you can use a combination of salary and dividends to reduce your personal Income Tax and National Insurance Contributions. You will not need to pay Income Tax or Class 4 National Insurance on personal earnings that are below the NIC lower profits limit.
The balance of your ‘salary’ can be taken from post Corporation Tax profits as dividends. No personal tax is due on the first £2,000 of dividend income (per tax year), and tax applied to dividends over £2,000 will be lower at a lower rate than Income Tax.
Whilst the private expenses of a director are treated as earnings, if that same director is a shareholder, these amounts can be treated as distributions.
You can receive different tax-free benefits and incentives, and the company will apply for tax relief on the cost of providing these.
Your mobile phones (1 per household) can be a tax-free expense if the contract is in the company’s name.
As a director, you can claim home expenses of £6 per week without receipts, or the company can reimburse you for light and heat expenses. The company may not reimburse you for mortgage interest or council tax.
Another option for directors is to set up a licence between you and your company for office rental within your home or outbuildings. If you use this methodology, then you can charge a proportion of mortgage interest and council tax to the rental bill. This income must, of course, be declared in your tax Self Assessment.
If there are multiple family owners of the business, then your accountant may be able to split income between these family owners and reduce tax commitments.
Profits – The tax advantages continue for a PLC as the company will be able to allocate far more costs to the tax-deductible category. This will be a big help in lowering your corporation tax bill each year.
Investment – As a smart, agile entrepreneur, you might find yourself at a growth crossroads where organic growth is not meeting the market demands. This is when you will need the ability to raise capital and encourage venture capitalists or shareholders to invest in your business. As a sole trader, you are a risky package; however, as a PLC, your business will have separated liabilities and will look more professional. This will imbue confidence in potential investors.
A PLC will also be able to raise capital via selling shares, and, as the company is separate from you, the director, the option of selling at a profit is permissible too.
Brand value – The intangible factor of perception must not be undervalued. A big advantage gained from a PLC structure is the impression it makes on potential clients, not only investors or financiers. There is an instant boost to your credibility and your brand’s gravitas. Having a more professional image will correlate directly to more business leads, higher profits, and a better calibre of clientele in the long run.
This greater respect from the market comes about from the general closer monitoring of PLC businesses, the statutory compliance obligations, and the public availability of information.
As with all things in life, there are always two sides to a coin. Let us look at the potential disadvantages of a PLC.
Disadvantages of a private limited company
The decision of changing your business to a PLC will bring some disadvantages that need to be factored into your assessment.
Administration – There are initial and ongoing administration implications. A limited business needs more time for its paperwork than a sole trader does, which can cause much eye-rolling from entrepreneurs. Such is the manner of the beast – with success comes growing administration.