Should I set up my tech business as a limited company?

Forming a company can offer tax advantages, security and extra credibility for your tech business, but it comes with additional responsibilities.

Despite incredibly challenging conditions, the UK tech sector has remained resilient at the start of this year.

Data compiled by Tech Nation and Dealroom for the Digital Economy Council revealed that startups in the UK raised $5.3bn in venture capital funding between January and May 2020.

Tech Nation has also reported that the UK is number one in Europe – and third in the world – for tech investment, with levels of investment increasing consistently between 2018 and 2019 across every stage of business growth.

If you're looking to start up your own tech business, one of your first major decisions you'll need to make will be choosing a structure, and deciding whether or not to form a limited company.

What are the advantages of forming a limited company?

• Limiting your personal liability.

As a sole trader, your personal and business finances are one and the same. Any debts you incur as a business are your own debts to pay back, and any financial difficulty you get into has the potential to affect your personal assets.

When you incorporate your business, it becomes an entity in its own right. That means if your company suffers financially, your personal assets are protected to an extent. This might be an important factor if you're planning to grow your business rapidly, as you'll generally need to take on some financial risks to do so.

• Tax benefits.

The current UK corporation tax rate stands at 19%, compared to income tax, which must be paid at 20%, 40% or 45% depending on your income.

Plus, pension contributions can be made tax-free from your limited company, offering you an efficient way to save for the future.

• Corporation tax breaks.

For tech businesses that carry out innovative work, research and development (R&D) tax credits can be a valuable incentive, with the SME R&D scheme offering a 230% total deduction of qualifying costs.

• New business opportunities – gives you status!

Adding to your credibility and giving you access to new partnerships, clients and investors. This is partly an aesthetic difference, as limited company status tends to come with a more professional image, but it's also because companies are subject to a higher level of regulation than sole trader businesses.

The disadvantages of forming a limited company

• Added responsibility.

As a company director, you must make decisions in the best interests of the company, not yourself. This might sound like the same thing if you're the sole director of your company, but a decision that benefits you personally might have a negative impact on your business, so you'll need to think carefully about the actions you take.

• Possibly more admin work that needs completing and sent to HMRC and Companies House. This includes:
  • Statutory accounts
  • A confirmation statement
  • A corporation tax return
  • A personal tax return as company director
• Record-keeping responsibilities.

You'll need to keep records on details about the company, and the people with significant control within it. Additionally, you will be required to keep records of all money that has been spent or received by the company, details of any assets owned by it, any debts it owes or is owed, and more.

Records must be kept for at least six years from the end of the financial year they relate to, but may have to be kept longer in some cases.

Where do I start? Ask yourself a few questions first:

We suggest you weigh up the pros and cons of forming a limited company, as the right answer will depend on your own circumstances. To help with that thought process we have put together a few questions to ask yourself first:

• Will incorporating make a significant difference to the tax you pay on earnings?
• How much profit do you expect your business to make, and how is that likely to change over time?
• Will you need a high level of investment in your business as it starts up?
• Is company status a major factor for potential clients or customers?
• Are you equipped to deal with complex reporting and record-keeping requirements?

At Lawrence Grant, our expert advisers can help you effectively structure your tech business. Find out more about our services for startups, or contact us for a chat.