5 advantages of being a limited company

Most entrepreneurs and businesses start out as sole traders for the sake of simplicity as there isn’t much contact with HMRC or Companies House and tax is paid in a similar way to salaried employment. A sole trade is the most popular way of running a business in the UK.

However, over time entrepreneurs decide to form a limited company for their business either out of personal preference or from the advice of their accountant.

There are many advantages and disadvantages to being both a sole trader and a limited company. The best option for you depends on your own circumstances.

Limited liability and legal entity

Running your business as a limited company means you have the reassurance of ‘limited liability’. This means that, in the event of the business failure, the shareholders will only be asked to contribute any amount that is unpaid on their shares (including any premium). In other words, the total liability is the value of the share capital they own.

Operating as a limited company, also means you and your company are distinct legal entities. Everything from the company bank account, to ownership of assets is separate from its owners. A limited company can therefore give you added protection should things go wrong as you only stand to lose what you invested in the business – your creditors cannot touch your personal belongings.

Taxation

The main benefit of running your business as a limited company is that you are generally more likely to pay less personal tax than you would as a sole trader as there are more options available for you.

A sole trader you will pay income tax and national insurance on your entire income; whereas with a limited company you will only pay corporation tax on your profits. The current 2019/20 tax year UK corporation tax rate is set at 19%.

If you are the director and shareholder of a limited company, you can withdraw on the company profits via a salary, a dividend, or even leave in the company altogether.

By paying dividends rather than a salary, you can minimise the amount of National Insurance Contributions (NICs) you have to pay because limited company dividends are taxed separately, and are not subject to NICs.

Another tax advantage is that your limited company can fund its director pensions as a legitimate business expense whereas sole traders cannot.

Name of your company

Once you have set up and registered your company with Companies House, your company name is protected by law. No other limited company can use the same name as you, or anything deemed to be similar.

You can also trade using a different name to your registered name; this is called a business name. A business name can be used by others unless you register your name as a trade mark.

By registering as a limited company, you will make your business more attractive to prospective clients as some larger companies and industries prefer only to deal with limited companies.

Growing and cashing out

Being a limited company, your options for growing, changing or restructuring your business are significantly increased.

A PAYE scheme can be created when recruiting new employees, they can be removed and added to the payroll very simply.

Additional investment can be achieved by issuing additional classes of shares. This means you can easily sell portions of the company or transfer ownership of the shares. If your limited company does have more than one shareholder, a Shareholders’ Agreement should be written up.

When the time comes where you wish to retire or sell the company, with a limited company set up the transfer of ownership is far easier than that of a non-registered business structure.

Administration and costs

A lot of people hold back from registering as a limited company due to the cost and administration to set-up as well as the day to day administrative burden. Limited companies are required to file returns with HMRC and Companies House every year; which also means information of your company will be available to the public. You as a director, are also bound to a set of rules called the Director’s Fiduciary Responsibilities.

Forming a company can cost as little as £15 and be completed within a few minutes due to the online form being dramatically simplified. Yearly returns, such as the confirmation statement (previously called an annual return), can also be prepared easily and painlessly online.

However, to reduce the administrative burden, Haines Watts can provide these services for you. As well as preparing and filing annual accounts and HMRC returns.

If you are interested in forming a limited company or would like additional advice, please call our Hull office on 01482 598694 or via email at hull@hwca.com