Should I set up a Company?

Should I set up a Company or Not?

There is no right or wrong answer about whether to trade as a company. In fact, to be perfectly honest it almost comes down to a personal choice for most.

What I find helpful in making the choice is to ask yourself what you’ll be doing in 2 – 5 years’ time. You can usually fit yourself into one of the categories below:

  • “This is a one-year contract, then I’m not sure what I’ll do”. I call this category the undecideds.
  • “Once this contract finishes I’ll get another contract”. These people are the career contractors
  • “I’m going to build this into a business and look at employing people and leasing an office.” These are the businesses.

The Undecideds

There is nothing wrong with being in this category but if you are I’d probably suggest that you operate as a sole trader rather than a company.

While you’re “dabbling your toes” in the contracting world, you won’t really need the benefits that a company can offer you, and if you decide that it’s not for you, then it’s a bit more difficult to close it down.

Career Contractors

This is probably the category that is the most difficult to decide or give a recommendation on, and really comes down to how you want to run things.

In April 2017 The Government introduced new laws around having withholding tax deducted from contractors working through a recruitment firm. The law applies to you even if you operate as a company, which was a waste of time for many of our contractor companies. There is no point deducting withholding tax from a company when the company won’t end up paying tax anyway as all the profits get passed through to the shareholders.

  • If you’re a contractor getting withholding tax deducted, then you might be leaning more towards running as a sole trader. If you do some quick calculations to work out what tax rate you should have deducted, it will almost feel like being an employee. You should be able to avoid having provisional taxes due and only end up with a minor end of year tax square up bill.
  • We have some clients who like to trade as a company and set themselves up as actual employees, paying themselves PAYE salaries. This can be a good way of keeping things simple from a personal viewpoint (you’re just an employee), so you can concentrate on running the company.

Businesses

This is really the only category where I would strongly recommend that you operate under a company structure.

  • Limited Liability.

Although banks, landlords and a lot of suppliers try and get around the limited liability of the company it does still offer protection.

I quite often refer to companies as “vehicles” to trade out of. A common scenario would be where you might have two contractors (whether it’s a personal relationship as well or just a business relationship) both trading out of the same company.

Later, a new person may come into the equation and could be added as a shareholder, and there can be different percentages. For example, 40 / 30 / 30.

People can exit the company, passing the reins over to the remaining shareholders.

I talk a lot with clients about the need to keep business and personal lives and transactions separated. Sometimes its just easier to do this when you have a company.

Rock Star or Rock Bottom?

As an accountant I’m in the unique position of seeing first hand how different sectors are performing, and its not pretty at the moment. Rather than looking at a newspaper article (well online – I can’t remember when I last read the paper), I’m looking first hand at John and Sally the plumber and his wife who are really struggling. I’m dealing with real people who are affected by this. I really feel that we are at Rock Bottom (well I hope it doesn’t go lower!)

  • My retailer clients have been screaming with pain with dropping sales levels
  • We’ve been spending more and more time working with receivers and tax debt consultants
  • ​We’ve still got more 2014 year work to do than ever before… because clients haven’t brought it in to be done yet – they can’t afford to pay us!
  • Electrical contractors are struggling, as are most tradespeople
  • Suppliers are getting tougher and tougher with their payments terms – they’ve been burnt too often
  • I’ve even got a number of previously high earning IT consultants who’ve been unable to find work
  • The IRD are getting more aggressive with their collections

OK is the new Good

I used to tell clients that as self employed people they needed to be making good profits. A good example of this is that if you own your own plumbing business… you should be making more money than if you were working as an employee, after all you’ve got so much more risk and responsibility.

Lately though, when discussing the year end results with client if they’ve hit zero or better then they’ve done well. I’ve seen so many negative figures in people’s reports.​

The idea is to stay afloat, live to see another day because eventually things will get better.

I don’t want to come across as all doom and gloom!

Yes there is still money to be made out there, and yes there are things we can do.

To finish on a positive note… I do get a sense that things are slowly starting to turn. Perhaps this is just eternal optimism… but I’ve got my fingers crossed!