Incorporating a limited company

Incorporating a limited company

Incorporating a limited company

Choosing to set-up a limited company is a popular choice in the UK. This post explains what is a limited company and shares how it can maximise your take-home pay, along with other advantages and disadvantages.

If the time has come and you are considering setting up a business, chances are, you have been made aware of the different types of company structure in the UK. It is even possible that your friends and associates are encouraging you to set up a limited company. Among the many reasons you hear pertaining to a limited company, these three main points are likely to stand out:

  • Your liability as a shareholder is limited.
  • Taxation rates can be more favourable.
  • You can be tax-efficient by taking a low salary and using dividends to make up your income.

But a limited company is not without its disadvantages and we must emphasise that your approach to tax must also be right and lawful, as HMRC can and do challenge company directors. It is with this in mind that our small business accountants want to share the ins and outs of incorporating a limited company so you have an idea if this is the right business structure for you.

What is a limited company?

Governed by the Companies Act 2006 and its own articles of association, a limited company is a legal entity with its own legal rights and obligations, a distinct advantage that is welcomed by most business owners.

Essentially, what it means is that the company can enter into contracts, receive income, own property, pay tax, employ people, sue and be sued. The rights and obligations of the company are separate from its shareholders, directors and employees. In the event that the company is insolvent, the directors are only liable for the amount they have invested in the company and are not held responsible for the company debts incurred in the ordinary course of business. The only exception is when the directors fail to meet their legal obligations and they do look out for the interests of the company, but that does not happen often as most directors do exercise a duty of care.

A limited company can be large with multiple employees or set-up with just one individual as the sole director of the company. A large number of contractors and small business owners prefer to set-up a limited company of their own as it probably is the most efficient method to maximise your take-home pay. The approach is to channel income through your limited company and paid out to you (and/or any other shareholders) in a combination of salary and dividends. This can result in tax savings, as dividends are treated differently to salaries in terms of tax.

Having said that, we advise contractors to have a chat with one of our contractor accountants to determine if you fall within or outside the IR35 rules.

Now let’s use some examples to illustrate how incorporating a limited company can boost your take-home pay.

Scenario 1: You are the sole director and your salary is £40k a year

In this scenario, you are the director and also the employee. You receive an income of £40,000 a year. In the tax year 2019/20, this means your take-home pay is about £30,736 as any salary calculator website can quickly tell you.

Scenario 2: You are the sole director. Your salary is £10k a year and you declare a dividend of £30k.

In this scenario, you are the director and also the employee. You receive a low salary of just £10,000 a year. To make up your income, at the end of the year after your company has paid company tax on the revenues, you declare a dividend of £30,000. As you are the sole director, you receive the full sum of the dividend. In the tax year 2019/20, this means your take-home pay is £37,923; this is £7,187 more than the previous example.

The above examples are simplified for discussion only. In reality, how much tax you pay depends on your circumstances. Nonetheless, it does illustrate to you why contractors and small business owners prefer to set-up a limited liability company. If you would like to know more about dividends, this post “Understanding dividends” is packed with information.

Other benefits of having a limited company

  • You can easily transfer ownership by selling shares to another party, this is particularly useful if you have an exit strategy in mind.
  • Shareholders (often couples or family members) can be employed by the company and reduce the overall family tax obligations.
  • A limited company looks more professional than a sole trader and if you are looking for funding, investors are more likely to invest in a limited company than a sole trader too.
  • It can fund pensions as a legitimate business expense.
  • Once you have registered your company, no one else can use the same name as your company.

Now the disadvantages of having a limited company

Everything has two sides and before you rush to incorporate a limited company, it pays to take a second to understand the disadvantages.

  • It can be expensive to establish and maintain a limited company.
  • The reporting requirements are complex and best handled by an experienced small business accountant. This will free up your time to focus on your business.
  • The company pays tax on the profits.
  • When the company declares dividends, you and your shareholders are responsible for pay tax on them, despite dividends have lower tax rates than salary.
  • The financial information of the company is made public by Companies House.
  • If any of the directors fail to meet their legal obligations, they may be held liable for the company’s debts.

Tax Agility can help you to incorporate a limited company

Before making a decision on how you should go about incorporating your company, it is best speaking to a qualified and independent small business accountant like our team here at Tax Agility. The reason is simple – there will be areas like VAT, tax incentives/ relief (such as the Annual Investment Allowance), cash flow management, and general financial control that we can assist you with and give you and your business the best chance to succeed.

At Tax Agility, we have been championing small businesses across Putney, Richmond and Central London for many years now. As everyone has a unique situation and aspiration, our personalised package starts from £105 per month + VAT. This means you can engage our service and use us as your financial controller without paying big money.

So let’s kick-start the conversation today. We are available on 020 8108 0090 or you can contact us online to arrange for a complimentary no-obligation meeting.

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This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.

by Donovan

Use of technology

Small Business: Use technology to your advantage

Small businesses in London can certainly use technologies to build stronger capabilities and seize growth opportunities.

Use of technology
In October 2019, when high street chains Karen Millen and Coast went into administrations and announced closures, the online fashion chain Boohoo acted swiftly to snap up the two brands following their collapse. But Boohoo is not keeping the stores open, instead they choose to relaunch them as online-only retailers.

If you have been following this piece of news and the closures of other high street stores, you can see that technologies have changed the way businesses operate and how goods and services are being delivered and consumed. In fact, it is said that consumers now spend one in every five pounds online; this means that traditional brick and mortar stores are seeing 20% fewer sales than before but they still need to maintain overhead (business rates, rents and wages) that increases every year.

Needless to say, to compete in the digital era, SMEs must develop digital capabilities and competencies. It is with this in mind that our accountants for London’s small businesses look to discuss how small businesses in London can utilise technology to help them streamline operations, improve their brand awareness, enhance customer service, bolster fiscal health and gain an edge over competitors.

How should my small business be using technology?

Using technology to streamline operations

In many small businesses, the owners and the employees tend to wear multiple hats. For instance, the sales person is likely to be the person who manages accounts and even chases unpaid invoices. The marketing staff may also take on the roles of web design, social media, or even photography. To help ease workflow, small business owners and their employees can turn to technology.

For instance, apps for project management, note taking, inventory tracking and document signing are inexpensive and brilliant in increasing efficiency. Cloud computing is another obvious choice. By storing your data in the cloud, you are essentially empowering your team members to literally work from anywhere as long as they have an internet connection.

Cloud computer does not limit to just servers and data storage though; cloud-based software is also a real money saver. In the UK, many small businesses have chosen to use Xero, a powerful cloud-based accounting software that is built for small business owners. If you would like to know more, check out this page about Xero and how it can help you to organise your business account and finance.

Using technology to improve your brand awareness and sales

In this digital age, having a web presence is a given and being visible in social media (Facebook, Twitter, LinkedIn, etc.) is also expected. But small business owners know that it can be a challenge to manage a company’s online presence. For a start, it takes time and efforts to make a landing page rank high on search engine results pages and more importantly, complaints rather than compliments tend to crowd your social media profiles.

While there are no silver bullets that can remove all digital challenges, small business owners can certainly use the following tactics to increase their brand awareness and sales online:

  • Launch targeted advertisement campaigns like Pay-Per-Click.
  • Give consumers a reason to visit your page, entice them with discounts or freebies.
  • Post fresh, engaging and relevant content regularly.
  • Partner with influencers who can help to promote your brand.
  • Seek help from a professional digital marketer and test out which digital channels are best suitable for your business.

It is important to treat your online presence like a business function – meaning you set objectives and measure the progress, and if things do not work out, change your strategy accordingly.

Using technology to enhance customer service

Once upon a time, Customer Relationship Management or CRM software was used solely by multinational corporations. Today, they are helping small businesses to capture and convert new leads, store customer information, automate your communication including drip sales emails, stay in touch with your customers, among other tasks.

The upshot is this – if you don’t know who is buying from you, or if you’re still relying on Excel to store the information of your customer, then it’s time to talk to one of the many CRM software experts and find a system that is best suitable for your business.

What about AI?

Artificial Intelligence or AI is undeniable a buzzword we often hear nowadays. The fact is most of us have already used AI-powered apps and devices in our daily lives and will continue to utilise AI through a piece of technology or equipment.

How should small business owners go about implementing technology?

When it comes to technology, the word relevant is key; what works for a company may not work for another. However, the process that helps you decide whether to use a piece of technology or not should be data-driven as opposed to relying on one’s gut feeling.

Let’s assume for a moment that every store in your area has installed a new digital payment but you. You believe that the new technology is too much of a hassle and you prefer to accept only cash. Whether your decision is right or wrong, only data (in this case your sales figure) can tell. If your sales remain strong despite you have chosen not to accept digital payment, then you can safely conclude that it is the right decision. However, if the absence of the new digital payment has hurt your bottom line but your gut feeling still resists it, chances are, you will lose out eventually.

In the event that you have decided to invest in a piece of technology, then it is worth measuring if the technology has indeed resulted in improvements in a certain area.

Tax Agility helps small businesses in London

Small businesses in London are rather progressive and forward-looking when it comes to embracing technology. Walking around Cavendish Square in Central London where one of our offices is located, it is relatively easy to see stores listing their website and accepting a myriad of digital payments including international options like WeChat Pay.

For small business owners considering bigger investment in technology, it is always worth looking at some numbers and calculate the return of investment first. If you need independent and honest advice pertaining to your accounts, you can give one of our small business accountants a call.

At Tax Agility, our small business accountants take on the accounting and bookkeeping duties for entrepreneurs in and around London, affording you more time to focus on your business.

The services we provide for London’s small businesses include:

Call us on 020 8108 0090 or get in touch via our contact page to arrange a complimentary, no-obligation meeting.

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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

by Donovan

Business planning

Planning the future of your business

Business planning

Your small business can flourish through business planning, continuous improvement and strategic advice.

Turning a business vision into reality requires entrepreneurs to navigate through a river called planning that is full of twists and turns, with rapids as well as areas of calm-moving water. Before launching a business, most entrepreneurs need to analyse their business idea and their appetite first, asking tough questions such as:

  • Are you ready to take on the challenges of being an entrepreneur?
  • Do you have the skills needed to run your business successfully?
  • Is your business idea viable?
  • Is there a market for your services or the products you intend to sell?
  • Is it worth investing your time and money into it?

After the analysis, it is time to put your thoughts down into a very important piece of paper called the business plan. Do not dismiss this step because a business plan sets you up for success when you first start, and it goes on to help you adapt as your business grows. Yes, you read that right – a business plan is not just for fresh-faced entrepreneurs who are eager to launch a business, it is also for seasoned small business owners who want to expand and grow. In this article, our small business accountants at Tax Agility put together what we have learned from working with small business owners throughout London over the years into tips that can help you plan for your business.

We cover:

  • What is a business plan and why is it vital to both start-ups and also established businesses looking to grow?
  • Business growth planning
  • Exit strategy planning
  • Business debt planning
  • How our small business consultants can help in each of the above situations

Let’s talk about business plan

In our line of work, it is common to meet entrepreneurs who trust their gut feeling more than a business plan. There is nothing wrong with it if you know how to translate your gut feeling into a series of actionable items and manage to assemble a team and sell your vision based on your gut feeling alone. In most cases though, gut feeling isn’t enough and this is where a business plan can help:

  • It helps to prioritise – By defining your business objectives, your business plan gives your business direction, maps out strategies to achieve your goals and helps you to manage possible challenges along the way. If you are already in business, use your business plan to recalibrate your objectives and set out plans to adapt to the changing market.
  • It gives you control over your business – Your business plan requires you to study the business landscape and know your competitors and other factors that may affect your success. If you are already in business, it is time to take a step back and review because your business plan should evolve based on your experiences – both successes and failures. A good rule of thumb is to review your business plan once in every six months.
  • It gets you funding – It is highly common for entrepreneurs to use their personal savings, liquidate their assets or even max out their credit cards to launch a business. But to sustain and grow the business, additional funding may be required and in this instance, your business plan is a tool that will help to convince investors why they should invest in your business. If you would like to know more about funding, “The complete guide to business funding” may make a good read.

What goes into your business plan?

A good business plan typically covers the following points:

  • Your business objectives, both short and long-term objectives
  • The products or services it will provide
  • What is your pricing strategy?
  • What is your budget?
  • What are your risks?
  • Who are your customers?
  • How do you reach out to potential customers so they are aware of you and your business?
  • Who are your competitors?
  • What sets you apart from your competitors? In other words, why should your customers buy from you and not them?

It can further expand to cover:

  • If your ideas or products are innovative, how do you protect them?
  • How do you keep up with technology?
  • At what point can you take on staff?
  • What is your exit strategy?

As you can see, you can make it as comprehensive as possible. The most important lesson here is not to write it and put it aside because you are busy managing the day-to-day. Use it, review it, improve it – because your business plan will empower you to think, plan and stay ahead of the game.

Let’s plan for your future together

It is worth noting that having a robust business plan is one of the many steps required to launch or to improve a business if you have already set-up your company. Other types of knowledge needed to make your business successful include cash flow, compliances, debt, gross profit margin, net profit margin, to name but a few. As not everyone is an accounting expert who understands numbers and how they can affect your business, it is time to reign in small business consultants like us who can help you do number crunching and maximise your business success.

We do this by:

  • Understanding your business and your objectives
  • Focusing on your interests
  • Analysing your numbers
  • Reviewing the key trends in your business
  • Forming tailored solutions for your needs
  • Offering cost-effective services
  • Providing honest and expert advice

At the end of the day, our small business consultants produce:

  • Annual business plans, forecasts, and projections
  • Management accounting complete with regular overview information
  • Review of credit control and cash flow
  • Attend important business meetings
  • Strategic plans for business acquisitions and disposals
  • Advice pertaining to capital structure and business valuations

If you would like to know how we can assist, give us a call on 020 8108 0090 today. In the next section, we will discuss specific planning pertaining to common issues faced by many small business owners today:

  • Business growth
  • Exit strategy
  • Debt reduction

Business growth planning

Businesses exist to make money and grow either organically or inorganically.

Organic growth refers to utilising your current business structure to increase output and boost sales, thereby driving growth. The process takes time and effort, but it is sustainable, less risky, and most importantly, it adds value to your company.

On the other hand, inorganic growth means you gain instant market share and revenues boost by acquiring or merging with another company. While it is risky, the benefits of having a larger market share are indeed attractive.

Most small business owners prefer to grow organically but some prefer the acquisition route, particular those in the high-tech industry. The thing is, there isn’t a standard business growth recipe that can be applied systematically to every business. Growing your company relies on your business model, your general management, and above all, your financial numbers. If you are planning to grow your business this year, either organically or through acquisition, contact one of our small business consultants and we would be happy to review your numbers and help you formulate a realistic growth plan.

Exit strategy planning

At some point you may be thinking of selling your business to a third party or finding an internal succession, and this process of withdrawing yourself from the business you have created should ideally be a smooth transition.

As small business accountants in London, we often hear from various business owners about their plan to sell up and in most instances, turning this concept into reality requires thoughtful planning. For instance:

  • How fast do you want to sell?
  • What is the valuation process?
  • Should you restructure the business to optimise the sale value?
  • How to ensure that all relevant tax issues are managed?
  • What is the due diligence process?
  • How to identify and evaluate potential buyers?
  • How to create a competitive bidding environment?
  • How to negotiate?
  • What are the strategies you can use to maximise the sale of the business?

The list goes on and touches on various elements, from addressing accounting and tax queries to a mountain of documents that spell out everything from confidentiality to terms of sale. If your plan is to exit the business, contact our small business consultants at Tax Agility today so we can help to kick-start the process and set the strategy in motion.

Business debt planning

Assuming you are in control of your cash flow, chances are, you should not need to borrow. Cash flow is really one of the biggest issues for small business owners and many people do not understand why they are suddenly short of cash when everything seems well. This is where our small business consultants can help – we are here to analyse your numbers and provide cash flow forecasts, as well as helping you to plan for multiple scenarios that will have an impact on your business.

In the event that your business is short of cash and you need to borrow, then these tips may be helpful to you:

  • Know your ability to pay it back before you borrow
  • Have a sensible repairmen plan, this will allow you to pay back the money and still have money to fund the operation
  • Know when you can be debt free
  • Plan how you can create extra income to pay off debt
  • Review how you can cut expenses and save, as a pound saved is a pound earned

Cash flow is a subject that many small business owners find it fascinating and if you are interested to know more, this post “Five ways to improve your company’s cash flow” highlights practical steps you can use to control your cash flow.

Tax Agility is your trusted small business consultants

Every business owner needs some forms of help – it can be someone helping you to figure out what’s next, someone providing a valuable second opinion, someone introducing new clients to you, and someone working with you to improve profitability.

At Tax Agility, our dedicated small business consultants work cohesively with you to help build your business and take it to the next level. We use numbers and data to recommend changes, mitigate risk and improve profitability.

Give our small business consultants a call on 020 8108 0090 today because your business deserves the best opportunity to succeed.

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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.

by Donovan

Happy New Year

Happy New Year

Happy New Year

Tax Agility wishes everyone a very Happy New Year.

If 2019 has not given you a reason to be confident about the future, then we hope 2020 will.

The tide of business ebbs and flows. One minute you may be making progress but you may also face set-back on the next corner; as long as you are prepared for them, you are likely to do well.

At Tax Agility, we are specialist accountants working with small business owners and contractors. If you need a pair of trusted hand in managing your finance, give us a call on 020 8108 0090 and we would be glad to discuss it with you.

Happy New Year.

by Donovan