Advantages of a Limited Company

When you have made the decision to set up a new business, one of the key things you need to do is decide which business structure to trade under – this will usually be either as a sole trader or via your own limited company.

According to Companies House, over 800,000 new companies are incorporated in the UK each year.

Here we look at some of the main advantages of a limited company, and whether running one might be right for you.

Let’s start at the beginning… what is a Limited Company?

The structure of a limited company means the company is legally separate from you, the owner or shareholders. The company has its own legal identity, and your personal finances are treated separately from those of the business.

This also means that shareholders normally have limited liability. If the company gets into financial difficulty, you will not usually be personally responsible for its debts simply because you are a shareholder.

There are exceptions, however, including cases where you have given a personal guarantee or where there is wrongdoing or a breach of directors’ duties.

This is in contrast to working as a sole trader, where there is no legal distinction between you and your business. You are personally responsible for the debts and liabilities of the business, so your personal assets may be at risk if the business cannot pay what it owes.

What are the advantages of a Limited Company?

Exactly that… you have limited liability!

Peace of mind can come with limited liability. As mentioned above, the company is a separate legal entity from its shareholders, so its debts are normally its own rather than yours personally.

This protection isn’t absolute, but it is one of the main reasons people choose to trade through a limited company rather than as a sole trader.

You’ll have greater tax planning opportunities

Running a limited company can give you more flexibility over how and when you take income from the business. Many people see this as one of the biggest advantages of running a limited company, although whether you actually pay less tax will depend on your profits and personal circumstances.

A limited company pays Corporation Tax on its taxable profits. The small profits rate is 19% for profits of £50,000 or less, while the main rate is 25% for profits above £250,000. Companies with profits between these limits may be entitled to Marginal Relief. The thresholds can also be reduced where a company has associated companies.

Unlike a sole trader, who is taxed personally on the business’s profits, a company director/shareholder can usually take money from the company through a combination of salary and dividends. The most tax-efficient combination will depend on your circumstances and the tax rates in force at the time.

You can pay yourself through a combination of salary and dividends

A dividend is a payment made by a limited company to its shareholders from available profits. For ordinary shares, the amount of dividends a shareholder receives will normally reflect the shares they own. For example, if you are the only shareholder, you would normally receive 100% of any dividend declared on those shares.

• You don’t pay National Insurance contributions on dividends.
• A combination of salary and dividends can help you manage your personal tax liability.
• A salary at a sufficient level can count towards your National Insurance record and entitlement to the State Pension.
• Salary and associated employer costs are normally deductible expenses when calculating the company’s taxable profit, provided they are incurred wholly and exclusively for the purposes of the business.
• Dividends can only be paid from profits available for distribution. You cannot simply take dividends because there is cash in the company bank account.

Here at Integro, we’ll be able to advise you on the best plan to put in place to maximise this tax benefit, and also guide you on when it may be most beneficial to move funds from your business. Further information on dividends can be found here: Contractors Guide to Dividends.

You can claim business expenses

Allowable business expenses are important because they reduce the taxable profit on which your company pays Corporation Tax.

The key is that an expense must meet the relevant tax rules to be deductible. Generally, a company can deduct revenue expenses incurred wholly and exclusively for the purposes of its trade, although some expenses have their own specific rules.

As a limited company director, your company may be able to claim costs including accountancy fees, business insurance, certain travel costs and employer pension contributions. There are also specific tax exemptions for some benefits and staff costs, including qualifying annual staff events.

Take a look at our limited company expenses guide for further information on allowable company expenses.

Your business may appear more credible

Rightly or wrongly, in some industries there seems to be a natural assumption that limited companies are more established or professional. Particularly if your business tends to deal with larger companies, some clients may prefer to deal with limited companies rather than sole traders.

This may lead to greater business opportunities you might not otherwise have had.

Operating through a limited company can also provide more options when raising finance, although lending criteria vary considerably between banks and other lenders. A lender may still ask directors to provide personal guarantees, particularly for a new or small company.

A protected company name

When you set up a limited company, you get to choose a name, absolutely one of the fun parts!

Once your name is registered with Companies House, no other company can be registered under the same name. Companies House also has rules covering names which are considered the same as an existing name or too similar to one.

This is different from trade mark protection, however. Registering a company name at Companies House does not automatically give you trade mark rights over that name.

Ready to set up your Limited Company?

If those advantages of a limited company sound attractive to you, it’s pretty straightforward to set up your limited company.

You can get started by completing our Company Formation page here. Or have a chat with us, and we can advise you on everything you’ll need to do and the best time to do it. Call us on 0207 0962659 or book a call back request with one of our friendly and highly experienced accountants.

For an immediate overview of your next steps, take a look at our handy article about setting up a limited company here. Alternatively, if you are still finding yourself unsure on the best company structure for you, read our first time freelancing guide to help make your decision.