February 2005

David Oliver, from DataScion Ltd, led an animated discussion on why some people running small businesses do so through limited companies.

He explained that he set up DataScion as a limited company in 1997 principally because a major client required that relationship. As a sole trader, if you do not pay your tax, national insurance, etc, your client(s) may have to do so. An example was produced by an attendee regarding the Construction Industry Scheme where clients make a deduction from the income of contractors and pay it direct to the Inland Revenue. It was thought this was in the region of 22%. For David's client dealing with a limited company was felt to be safer.

David recommended that the basis of any work should be a contract outlining the scale of work and client/company relationship.

David still retains the same major client today, but currently with a smaller throughput.

Others create a company for tax benefits. If the business is small and not very profitable it may not be worth it, but Corporation tax is 19% and so dividends received are "tax paid" for normal rate tax payers.

Another advantage is that of limited liability. The company is liable for its actions, but not the shareholders, and the directors are only liable for fraudulent or improper actions. This is a big difference, David explained, as is the ability to raise loans using a floating charge over some or all of the assets - something a sole trader cannot do.

Some people create a limited company because they believe it is worthy of higher status. For others, as the business grows the owner(s) may wish to work less, and leave the running of the business to employees. As a sole trader, he explained, you are very interested in business success and losses created by your managers and employees. As a major shareholder in a limited company you are still able to control the company, but are separated from the personal reponsibility for any losses.

The last advantage David put forward was that of the company name. A limited company has a unique name. A sole trader may not be able to protect the business name unless exceptional steps are taken, such as having a non trading limited company set up purely to register the business name.

There are disadvantages, though, David explained. There are annual, certified accounts to submit to Companies House and the Inland Revenue. Those held by the former are public records. It is also difficult to close down a company. Shareholder-directors have to distinguish between their personal roles as a shareholder and that of the responsibilities of running company - they are not one and the same, i.e drawings and loans are not possible in the same as for sole traders.

David explained that the easiest way to form a company is to get one 'off the shelf', explaining that there are a number of businesses whose sole role is to set up companies for others. If converting from a sole trader to a limited company you can sell your business to the company in return for shares. Your Articles and Memorandum of Association will be needed to set up a company bank account. If you close the company at a later date and realise a sum of money , there may be tax to pay. There are also rules about company letterheads, registered offices, Annual General Meetings, shareholdings, minutes and resolutions, plus many more.

David explained that leaflets on all aspects on running companies are available from Companies House and the Inland Revenue, as well as books on the subject.