LPC
ADVANTAGES OF A LIMITED COMPANY
Ten benefits of running your business as a Limited Company instead of being a Sole Trader or Self-Employed
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 are highlighted 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.
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.
1. Tax
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 its intention to cut UK Corporation Tax to 17% from the tax year starting in April 2020.
Scotland now has a different tax system and different rates apply.
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.
By doing this 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.
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 and how to Pay yourself tax efficiently through a limited company please speak to a colleague from our team of experts.
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 are 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.
4. Professional
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.
5. Funding
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.
6. Naming
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.
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 get a Shareholders’ Agreement.
8. Costs
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. The cost of preparing annual accounts for a limited company is more than they would for a sole trader. The differential varies so ask what both options would cost you. Many service providers have packages that include all administrative work and the preparation of accounts and payroll. This reduces the stress and paperwork you need to handle.
9. Pensions
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.
10. Succession
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.
For more details please visit
bergenassociates.co.uk
