Who knows what you earn?
At present, the only people who know what you earn are your accountant, maybe whoever does your salaries internally and, of course, anyone you share this information with. But when the Companies House reforms kick in, your company profit and loss accounts will be there for everyone to see.
While there has not yet been a date set for this change in requirements, it has been confirmed that all businesses who are registered at Companies House will have to file profit and loss accounts. Currently, the requirement is only to file a balance sheet, which doesn't reveal the actual company profits.
As with most things, there are pros and cons.
The Pros
- Your suppliers can see how you're doing and will be more comfortable agreeing to credit arrangements
- Credit agencies will provide more accurate credit ratings
- If you're a company director mortgage companies will get a better view of your personal situation
- It can make it easier to get funding or finance to grow your business.
The Cons
If you have a bad year there can be detrimental effects – in fact, all of the pros can become cons!
The other big issue is that your staff and contractors can work out what you earn and use it as leverage, when they're asking for a rise or setting fees. If they know what you can afford, it provides them with a benchmark for what they consider it reasonable to ask for.
Limited or Unlimited?
With the changes in tax legislation, there's not a huge tax benefit of being a limited company depending on your profit levels.
If you have family who are not working elsewhere, then being a limited company can give you advantages. Your partner or adult children can be on the payroll or shareholders and could earn up to £50K each and still pay basic rate tax depending on their circumstances. This reduces the corporation tax and personal tax you're liable to pay.
Whether staying limited or not, you'll need to have a chat with your accountant about whether it's beneficial to remain a limited company.
The big issue that should be taken into account before you change your company status is business risk. If you go bust as a sole trader your personal assets are at risk – in other words, you could lose your home. As a limited company, you are one step removed. As a director you are, technically, an employee and your personal assets are protected if the business goes down for legitimate reasons.
The bottom line is that you may need to be smarter about what you report and when, the timing of when dividends are taken, and other issues. While your company accounts may currently be drawn up to make best use of tax legislation, you may need to look at things differently in view of having your profit and loss account on public display.