Limited companies are an increasingly popular choice for IT companies looking to establish themselves as a formal business entity. But with so many options available, it can be difficult to determine the true cost of being a limited company. In this article, we will explore the various costs associated with setting up and running a limited company, including formation fees, taxes, and other expenses.
Formation Fees
The first and most obvious cost of becoming a limited company is the formation fee. This is the fee charged by the relevant government agency for registering your company. The exact cost of formation fees will depend on the country in which you are setting up your company, but in general, it can range from a few hundred dollars to several thousand dollars.
In the UK, for example, the current formation fee for a limited company is £125. However, this does not include other associated costs such as share issuance fees or the cost of obtaining a business bank account. In the US, the cost of forming a limited liability company (LLC) can vary depending on the state in which you are setting up your company, but it typically ranges from $100 to $300 per year.
Taxes
Once your company is formed, there are several different taxes that you will need to pay. These include corporation tax, income tax, and National Insurance contributions. The exact amount of tax you will need to pay will depend on the profitability of your business, as well as other factors such as your location and industry.
In the UK, for example, companies are required to pay corporation tax on their profits. The current rate of corporation tax is 19%, but this is set to increase to 25% in April 2023. In addition to corporation tax, employees will also be subject to income tax and National Insurance contributions.
In the US, companies are required to pay federal income tax on their profits. The current rate of federal income tax for LLCs is 21%, but this can vary depending on the state in which you are setting up your company. In addition to federal income tax, employees will also be subject to state and local taxes, as well as Social Security contributions.
Other Expenses
In addition to taxes, there are a number of other expenses that limited companies must pay. These include salaries for employees, rent and utilities for office space, equipment and supplies, and marketing and advertising expenses. The exact amount you will need to spend on these expenses will depend on the size and type of your business.
One expense that is often overlooked by new company owners is the cost of legal fees. As a limited company, you will be subject to various legal requirements, including registering for taxes, complying with health and safety regulations, and maintaining accurate financial records. These costs can add up quickly, so it’s important to factor them into your budget from the outset.
Case Studies
To give you a better understanding of the true cost of being a limited company, let’s look at some real-life examples.
In the UK, a software development company with five employees would expect to pay around £250,000 in annual taxes (corporation tax and National Insurance contributions) and approximately £175,000 in salaries and expenses for its employees. In addition to this, they would need to factor in the cost of legal fees, equipment and supplies, and marketing and advertising expenses.
In the US, a software development company with ten employees would expect to pay around $125,000 in federal income tax and approximately $625,000 in salaries and expenses for its employees. Again, this doesn’t include the cost of legal fees, equipment and supplies, and marketing and advertising expenses.
FAQs
Q: How much does it cost to form a limited company?
A: The cost of forming a limited company will depend on the country in which you are setting up your company, but it can range from a few hundred dollars to several thousand dollars.
Q: What taxes do I need to pay as a limited company?
A: Limited companies are required to pay corporation tax on their profits and employees will also be subject to income tax and National Insurance contributions (in the UK) or federal income tax, state and local taxes, and Social Security contributions (in the US).