Setting up a limited company is one of the most popular ways to run a business in the UK – and for good reason. From tax planning to legal protection, there are several significant advantages to incorporating.
This guide covers 15 key benefits of trading through a limited company in 2026 compared to operating as a sole trader.
Contents
- Limited liability for directors
- Limited companies are still tax-efficient
- The company formation process is simple and quick
- Company incorporation costs are low
- The company is a distinct legal entity
- You can provide a professional image
- Your company name is protected
- Access to finance is easier
- Shareholders own the company
- Low ongoing costs of running a company
- Tax relief on pension contributions
- Tax planning opportunities
- Dormant company status is available
- Tax-efficient life cover for company directors
- Planning for the future
1. Limited liability for directors if things go wrong
Being a director of a limited company means you have the benefit and security of ‘limited liability’.
This means your liability for any financial losses your business suffers 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.
A limited company can therefore provide you with added protection should things go wrong.
If things go wrong with a sole tradership (or partnership), the owners are personally liable for all the business’s debts and liabilities.
This is one of the key benefits of incorporating, compared to working as a sole trader
2. Limited companies are still tax efficient
One of the most well-known benefits of working through a limited company is that it is typically a more tax-efficient way to trade than going self-employed.
The tax gap between trading structures has narrowed significantly in recent years, primarily due to increases in dividend tax rates in 2016, 2022, and from April 2026, as well as the April 2023 Corporation Tax hike.
Key points
- Limited companies pay Corporation Tax on their profits.
- Many company owners pay themselves a modest salary and distribute additional profits as dividends.
- Significantly, National Insurance is not paid on dividends; it is paid on salaries.
- As a sole trader, all your profits are subject to income tax and NICs.
- If you own the company with your spouse, you can make the most of your individual tax allowances.
- Working through a limited company allows you to take home a greater proportion of your earnings after tax.
You can learn more in this popular guide to paying yourself tax efficiently through a limited company.
Try our limited company tax calculator to work out how much tax you’ll pay on profits this tax year.
3. The company formation process is quick and straightforward
Forming a new company has become increasingly efficient in recent years.
If you apply online, you can complete the application process in as little as 20 minutes.
Alternatively, a formation agent or an accountant can handle the incorporation for you, saving you time and ensuring everything is done right.
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Your new company will often be legally formed in under 4 hours during the working week.
4. Company incorporation costs are low
You can form a new company for as little as £50 via Companies House, which is remarkably low despite an official fee increase from £12 in May 2024.
The cost of using a formation agent for incorporation is typically between £50 and £100.
If you want to use an accountant, the cost is usually low or free if you sign up as a new client.
5. The company is a distinct legal entity
A limited company is a separate legal entity from its owners.
Everything from the company bank account to asset ownership 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.
6. You can provide a professional image
Working via your own company may give your business 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 operate via an intermediary—your own limited company or an umbrella.
7. Your company name is protected
Once you register a company with Companies House, the company name is legally protected.
No other business may use the same name as yours or anything 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, require you to undertake the costly and time-consuming effort of changing your business name.
8. Access to finance is easier
Starting a new business can present challenges in securing financing.
As a new enterprise without an established track record, the company may be viewed by lenders as a relatively high-risk investment compared to more mature businesses.
This can make 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 can assume debt obligations, rather than the business owner being personally responsible.
It’s worth noting again (see ‘limited liability’ above) that, despite the legal separation of entities, some lenders may still require personal guarantees from company directors before advancing a loan to a limited company.
9. Shareholders own the company
A limited company can issue various classes of shares. This means you can easily sell company stakes or transfer share ownership.
If your limited company has more than one shareholder, you should create a shareholder agreement outlining your duties and responsibilities.
It can also 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 outline how to resolve conflicts or issues should problems arise.
10. Low ongoing costs of running a company
Many people prefer to operate as sole traders rather than limited companies because start-up and running costs are perceived as significantly lower.
In the old days, you would have to pay an accountant to compile your accounts manually, but technology has made life much easier for accountants and business people.
Using an online accounting app will cut the time you spend on bookkeeping – your business records will be stored securely, and you can connect your account to your business bank account and even submit VAT and self-assessment returns automatically.
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 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 to explain what the different options cost.
11. Tax relief on pension contributions
If you own a limited company, pension contributions are deductible business expenses, reducing the company’s 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 operating through a limited company has declined over the past decade. However, tax relief on pension contributions still represents a significant benefit for company owners.
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 utilise their tax allowances.
For example, you will pay less personal tax 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 one and keep it dormant.
This means that your business name is protected. If you’re a sole trader, you may want to secure the ‘limited’ version of your trading name, which comes with fewer obligations compared to running a ‘live’ company.
If you want to shut down your company temporarily, you can revert to dormant status. This allows you to take back the reins if you’re going to resume trading.
If you own a dormant company, you still need to take care of some (minimal) filing obligations.
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 vital benefits a limited company offers when it comes to succession planning and protecting your assets:
- Transferring ownership of a limited company is a more straightforward legal process than transferring a sole trader’s business if a shareholder retires, sells shares, or dies.
- If you are eligible, you may be able to sell your shares in the future and pay a lower 14% tax on the gain (18% from April 2026!), courtesy of Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief).
You should always seek professional advice before starting a business, as your choice of business structure will depend significantly on your circumstances.
Some useful services
- To set up a company immediately, with prices starting at just £52.99, visit 1st Formations.
- Visit ITContracting.com for dedicated guides for limited company contractors.
- Try our limited company profits calculator for 2025/6.
- Read about some Companies House changes from March 2024 onwards.
