Does your business need a company?

Lots of people describe their ‘business’ as a ‘company’ even though the two words do not mean the same thing.

This is not the place to explain all of the differences or the obligations that you take on if you form a limited company. Too many people make a quick choice because they have heard that one approach or another will mean they will pay less tax on their profits. That doesn’t mean it’s the right choice for them. Are there any non-tax reasons why you may need to operate your business through a company? It depends on a number of factors and your accountant should be able to help you decide. Certainly a company will generally find it easier to raise finance and your bank may also prefer it because of the greater regulation that applies to companies.

For the moment let me just stress that many people find it difficult to grasp the idea that their company is a distinct legal entity. If you set up a company you need to remember that the company bank account and other assets are not yours so you cannot just take money out of the company’s bank account when you feel like it.

You will need to decide whether you want an accountant who just skirts around these issues and undertakes to sort out everything for you. Or would you prefer an accountant who tries to help you understand the issues and lets you decide whether you will be able to cope with the administration – even with your accountant’s expert help? And what will it all cost? How do the extra charges for running a limited company compare with the tax savings you hope to achieve? Do YOU think it’s worth it? Many people do. Equally many people don’t get to find out that they have a choice and that the hoped for tax savings get swallowed up by additional accountancy fees.

Ultimately you need to determine whether or not you should launch your business as a limited company, as a sole trader or as a partnership. Ask your accountant to help you understand the options but do not accept their advice until you understand whether or not it is right for you.