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10 advantages of setting up a limited company

Although being a sole trader is the most popular way of running a business in the UK, there are many advantages to operating via a limited company.

Here, we highlight 10 of the biggest advantages a limited company gives you over working as self-employed.

1. Limited companies are tax efficient

One of the most well-known benefits of working via a limited company is that – in most cases – your overall tax burden – as an owner/director – will be lower than a sole trader.

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.

Key points

  • 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 payable on dividends – but it is on salaries.
  • As a sole trader, all of your profits are subject to 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.

Try our limited company tax calculator to work out how much tax you’ll pay on profits this tax year.

2. Distinct 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.

3. Limited Liability

Being a director of a limited company means you have the benefit and security of ‘limited liability’.

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

4. 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.

5. Protect 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.

6. 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.

7. Shareholders

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.

8. 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.

However, you can form a limited company with our Company Formation Partner, 1st Formations, for as little as £12.99, so the cost of setting up a company is minimal.

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.

You can get a 30-day free trial here + a 10% discount as a Bytestart user.

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.

9. 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.

Given how the tax advantage of working via a limited company has been reduced significantly over the past decade, pension contributions represent probably the single biggest remaining benefit for company owners.

Find out more about paying into a pension via your company here.

10. Planning for the future

Here are three 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).
  • If you want to take out life insurance to protect your family, if you set up a relevant life insurance policy via your company, the premiums are tax-deductible. You could save up to 50% compared to paying for life cover personally.

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 circumstances.

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