Although the sole trader route, which is commonly referred to as being self employed, is the most popular way of running a business in the UK, there are significant advantages of operating as a limited company.
Here, we highlight 10 of the biggest benefits a limited company gives you over working as self-employed.
Starting up as a sole trader is without doubt the simplest way to start a business in the UK. All you need to do is inform HMRC that you are working as ‘self employed’, and account for your business activities through the annual self assessment tax process.
The main benefits of being a sole trader are highlighted in ByteStart’s Guide to 7 Key Advantages of Running Your Business as a Sole Trader.
Setting up in business as a limited company involves a more complex formation process, and the financial and administrative responsibilities of running a limited company are certainly greater than those of a sole trader.
There are pros and cons to both the self employed and the limited company routes. Which option is best for you depends on your own particular circumstances so it’s important to look at the key differences between these two business structures.
The main advantage of running your business as a limited company is that you are likely to pay less personal tax than a sole trader.
Limited company profits are subject to UK Corporation Tax, which for the current 2018/19 tax year is set at 19%. The Government has stated it’s intention to cut UK Corporation Tax to 17% from the tax year starting in April 2020.
If you are the director and shareholder of a limited company, you may choose to take a small salary and draw most of your income in the form of dividends.
As a sole trader, your entire income is subject to NIC rules. Running your business as a limited company could therefore help you to take home more of your earnings.
You can find out more details of this in our guide to Paying yourself tax efficiently through a limited company.
2. Distinct Entity
A limited company is a completely separate entity from its owners. Everything from the company bank account, to ownership of assets and involvement in tenders and contracts is purely company business and separate from the interests of the company’s shareholders.
A sole trader and his/her business is treated as a single entity for tax and administrative purposes.
3. Limited Liability
Running your business as a limited company means you have the reassurance of ‘limited liability’.
Assuming no fraud has taken place, your ‘limited liability’ means you will not be personally liable for any financial losses made by your business. A limited company can therefore give you added protection should things go wrong.
Those running a business as self employed do not enjoy such protection from financial claims if things go wrong with their business.
In some businesses and industries, having a limited company can provide a more professional image.
If you are doing business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships.
Finding funding can be difficult for all types of new businesses. But because a limited company is a distinct entity from its owners it may be a little easier for a company to secure business finance than it is for their sole trader counterparts.
Once you register your company with Companies House, your company name is protected by law. No-one else can use the same name as you, or anything deemed to be too similar.
As a sole trader, it’s possible someone else could trade under the same name as you, and you couldn’t do anything about it. This could damage your business, and in some cases, result in you having to go through the costly and time-consuming effort of changing the name of your business.
A limited company can issue various classes of shares. This means you can easily sell stakes in the company, or transfer ownership of shares.
If your limited company has more than one shareholder you should get a Shareholders’ Agreement.
Many people prefer to operate as a sole trader rather than a limited company because the start-up and running costs are perceived to be significantly lower. However, you can form a limited company from as little as £15, so the price of setting up a company really is minimal.
Most accountants will charge more for preparing annual accounts for a limited company than they would for a sole trader. The differential varies so ask your accountant what both options would cost you.
Historically, you would pay your accountant to handle all of the administration involved with a limited company, but most of these tasks can now be done fairly easily and painlessly online.
If you’re reasonably competent with a computer, you can easily handle limited company administration paperwork such as submitting your Confirmation Statement (what used to be the Annual Return) to Companies House every year yourself. Doing this yourself will help to keep down the cost of an accountant.
A limited company can fund its employees’ executive pensions as a legitimate business expense. This can offer a tax advantage over those who are running their business as self-employed.
If a shareholder wishes to retire, sell his shareholding, or dies, it is far easier to transfer ownership of a limited company than a non-registered business structure.
More on choosing the best business structure for your new venture
You can find more help on the subject in the following ByteStart guides;
- Which Business Structure Should You Choose for Your New Business – Sole Trader, Limited Company, Partnership or LLP?
- Set Up a Limited Company or Be Self-Employed – Which is best for me?
- 5 Things You Must Do When You Go Self Employed
More on starting your own business
ByteStart is packed with help and tips on all aspects of starting and running a small business. Check out some of our most popular guides;
- 10 Do’s and Don’ts of writing a business plan
- How to create business cards that make a big impression
- ByteStart’s 60-second guide to Value Added Tax (VAT) for start-ups and small businesses
Funding your business
- A Guide to Alternative Business Funding – The New Finance Options for Small Businesses
- Finding finance for your new business – funding advice for start-ups
- What to do when the bank says “NO”!
Money & Tax matters
- Sole trader tax – a guide for start-ups and the newly self employed
- ByteStart’s Guide to the main business taxes
- Corporation Tax – How to reduce your bill
You should always seek professional advice before starting up in business, as your choice of a business structure will depend very much on your own individual circumstances.