Although being a sole trader is a popular way of running a business in the UK, there are many advantages to trading via a limited company.
In this article, we highlight 15 key benefits of setting up your own limited company in 2024.
1. Company incorporation costs are low
You can form a new company for as little as £12, which is a remarkably low cost.
2. The company formation process is simple and quick
The process of forming a new company has become increasingly efficient in recent years.
You can complete the application process in as little as 20 minutes if you apply online.
In many cases, your new company will be legally formed in under 4 hours during the working week.
3. Limited companies are tax efficient
One of the most well-known benefits of working via a limited company is that it is typically a more tax efficient way to trade compared to going self employed.
It is worth mentioning that the tax gap between trading structures has narrowed significantly in recent years – primarily due to the increase in dividend tax rates in April 2016, and the April 2023 Corporation Tax hike.
- Limited companies pay Corporation Tax on their profits.
- Many company owners pay themselves a small salary and extract further profits as dividends.
- Significantly, National Insurance is not paid on dividends – but it is on salaries.
- As a sole trader, all of your profits are subject to income tax and NICs.
- As a result of working via your own limited company, you can take home a greater proportion of your earnings, after tax.
You can find out more in this popular guide to paying yourself tax efficiently through a limited company.
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Try our limited company tax calculator to work out how much tax you’ll pay on profits this tax year.
4. Distinct Legal Entity
A limited company is a separate legal entity from that of 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 a single entity from a legal and tax point of view.
5. Limited Liability
Being a director of a limited company means you have the benefit and security of ‘limited liability’.
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This means that your liability for any financial losses suffered by your business is limited. You are not liable to pay any business debts personally.
The only time a limit to your liability would be removed is if you are found guilty of wrongful or fraudulent trading.
Some lenders may also seek personal guarantees from directors for company loans.
A limited company can therefore give you added protection should things go wrong.
If things go wrong with a sole tradership (or partnership), the owners are personally liable for all the debt and liabilities of the business.
This is one of the key benefits of incorporating, compared to working as a sole trader
6. Providing a professional image
Working via your own company may provide your business with a more professional image.
You are also likely to find that larger firms prefer to deal with incorporated businesses rather than sole traders.
If you’re a professional contractor, for example, clients will only work with you if you are operating via an intermediary – your own limited company, or an umbrella.
7. Protection for your company name
Once you register a company with Companies House, the company name is legally protected.
No other business can use the same name as you, or anything deemed too similar.
As a sole trader, 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.
8. Access to finance is easier
Starting a new business can present challenges when it comes to securing financing and funding.
As a brand new enterprise without an established track record, lenders may view the company as a relatively high-risk investment compared to more mature businesses.
This makes it difficult to obtain loans or credit, especially in the early days.
However, there are some advantages to securing financing as a limited company rather than as a sole trader.
Limited companies have a separate legal existence from their owners and shareholders. This means the company itself can take on debt obligations rather than the business owner being personally responsible.
It’s worth mentioning again (see ‘limited liability’ above), that despite this separation of legal entities, some lenders may still seek personal guarantees from company directors before advancing a loan to a limited company.
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 create a shareholders’ agreement which outlines your various duties and responsibilities.
It can also be used to detail what shareholders can and can not do with their shares. This will prove invaluable should a shareholder want to exit the business.
A shareholders’ agreement will also describe how to solve conflicts or issues, should things go wrong.
10. Low ongoing costs of running a company
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.
In the old days, you would have to pay an accountant to manually compile your accounts, but technology has made life much easier for both accountants and business people.
Using an online accounting app will cut the time you spend on bookkeeping. Our favourite, FreeAgent, can even be used to file your VAT and Self Assessment Tax Returns directly to HMRC.
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If you’re reasonably competent with a computer, you can also easily handle limited company administration paperwork such as submitting your Confirmation Statement to Companies House every year without any help.
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.
11. Tax relief on pension contributions
If you own a limited company, pension contributions are deductible business expenses for the company, reducing its taxable profits. In other words, you don’t pay Corporation Tax on the amount of money the company pays as pension contributions.
The tax advantage of working via a limited company has been reduced significantly over the past decade. However, tax relief on pension contributions still represents a significant benefit for company owners.
Find out more about paying into a pension via your company here.
12. Tax planning opportunities
As a limited company director, you have access to tax planning benefits unavailable to the self employed.
You can co-own your company with other family members – often a spouse. This means that all shareholders can make use of their own tax allowances.
You will pay less personal tax, for example, if dividends are distributed between spouses, rather than to a single shareholder.
Company directors decide when to distribute profits to shareholders. This gives you the flexibility to time dividend payments across different tax years.
13. Dormant company status is available
If you are not ready to set up a company, you can still form a company and keep it in a dormant state.
This means that your business name is protected. If you’re a sole trader, you might want to secure the ‘limited’ version of your trading name, without the obligations associated with running a ‘live’ company.
If you want to shut down your company for a while, you can also revert to dormant status. This allows you to pick up the reigns again in the future if you want to re-start trading.
There are still some (minimal) filing obligations to owning a dormant company. Read our guide here.
14. Tax-efficient life cover for company directors
Company directors can benefit from the tax-efficient treatment of life insurance and income protection policies, if taken out in the company’s name.
If you set up a relevant life insurance policy via your company, the premiums are an allowable tax-deductible business expense.
You could save up to 50% compared to paying for life cover personally.
15. Planning for the future
Here are several key benefits a limited company offers when it comes to succession planning, and protecting your assets:
- It is a simpler legal process to transfer ownership of a limited company than a sole tradership if a shareholder retires, sells some shares, or even dies.
- If you are eligible, you may be able to sell your shares in the future and pay as little as 10% tax on the gain, courtesy of Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief).
You should always seek professional advice before starting up in business, as your choice of a business structure will depend very much on your circumstances.
Some useful services
- To set up a company immediately – with prices starting at just £12.99, visit 1st Formations.
- Find a specialist limited company accountant in our directory.
- Try our limited company profits calculator for 2023/4.
- Read about some Companies House changes from March 2024 onwards.
- Lots more useful guides on LimitedCompanyHelp.com.