The pros and cons of forming a limited company
Many people working in showbusiness are self-employed. However, there are occasions when it might make more sense to form a limited company. But how do you know whether that’s the best choice, and what the potential advantages and disadvantages are? These will vary from person to person but here is a quick overview of just a few of the main pros and cons.
Lower taxes. The profits from a limited company are subject to Corporation Tax, which attracts a 19% tax rate, decreasing to 17% from April 2020. You can take a small regular salary and also pay yourself dividends. The advantage is that these aren’t affected by the rules for National Insurance Contributions, so you could end up paying less tax overall.
Lower liability. If you’re self-employed and you make losses, your business won’t be protected against claims and you could be made bankrupt. However, a limited company gives you greater protection as you’ll have limited liability for any debts you’ve incurred.
More expenses. With a limited company, it’s possible to claim for a wider range of expenses related to business use. It’s always worth discussing which expenses can be claimed with your Showbiz Accountant.
Greater complexity. Being classed as self-employed or a sole trader means that your tax affairs are relatively straightforward. A limited company involves more complex administrative and financial work.
Higher costs. Because the finances of a limited company are more complex, the costs of using an accountant to handle your affairs will be higher than if you remain self-employed. However, it’s advisable to use an accountant, as there can be heavy penalties for providing the wrong information to HMRC. Although this might initially seem to be a disadvantage, the additional costs are often outweighed by tax savings.
Access to money. As a self-employed sole trader, you can access any of your earnings very easily. As a limited company, you’re restricted to being paid a small salary and to drawing dividends. There are usually tax savings to be made in receiving your money in this way, however.
To be or not to be? That is the question…
There is little doubt that being self-employed is simpler than being a limited company. Generally, most single performers will be happy remaining as sole traders. There can also be other drawbacks to becoming a limited company: read our May 2019 blog on the risks of having a personal services company.
However, when life becomes more complicated, it could be advantageous to form a limited company. For instance, if you’re a member of a band and you’re all self-employed, you’ll all be equally liable for any debts. So, any one of you could make a bad decision that would have implications for the others. Or one of you might leave, in which case, the partnership comes to an end and the person leaving could stop the others from using the band’s name. A limited company can provide protection from such issues.
As mentioned earlier, everyone’s situation is different. So, if you’d like advice on whether or not you should form a limited company, please call us at The Showbiz Accountant (0203 3842224 in the UK or +1 424 228 9700 in the US) and we’ll be happy to help you.