A limited company is one of the most common legal structures in the UK for all types and sizes of businesses. This is because it provides numerous professional and financial benefits that far outnumber those available to sole traders or contractors working through an umbrella company.
Top ten advantages of a small business
The primary benefits of doing business as a limited company are limited liability, tax efficiency, and professional status. However, there are a few other limited company benefits available. Each one is discussed in turn below.
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1. Reducing personal liability
The most significant advantage of forming your own company is limited liability protection. Simply put, if your company goes bankrupt, your personal assets will be safe. This is due to the fact that a limited company is treated as a distinct legal entity; a legal 'person' in its own right. As a result, the company is distinct from the people who own and manage it.
The 'corporate veil' refers to this separation. Any debt, losses, or legal claims incurred by the company are the sole responsibility of the company, not its owners (shareholders/guarantors) or directors. You will have no legal obligation to pay more than the nominal value of the shares you own as a shareholder. If your company goes bankrupt and is unable to pay its creditors, you will only have to contribute the nominal value of your unpaid shares. Aside from that, your personal assets will be safeguarded. Most shares have a nominal value of £1, which is standard practise. This means that depending on the number of shares issued and purchased, your liability could be as low as £1. However, in rare cases (such as fraud or wrongful trading), the corporate veil may be 'lifted' or 'pierced,' leaving shareholders (and directors) personally liable for company debts.
Self employed people, on the other hand, take on significantly more risk. They are personally liable for all commercial debts, losses, and liabilities. As a sole trader, you and your company are inseparable. If the company owes you money, you owe money as well. As a result, your personal assets, such as your home and savings, may be seized to pay your creditors.
If you intend to provide high-value supplies or services that may result in liability claims, you must limit your liability. If such a situation arose while operating your business as a limited company, you would not be required to use your personal assets to cover these liabilities unless you provided a personal guarantee to the company or were found guilty of wrongful trading or other criminal acts.
2. Defending a company's name
All company names must be completely unique, so no two companies can be formed with the same or even very similar names. Your company's official name cannot be registered and used by another company. This protection does not apply to a sole trader's business name.
3. Credibility and trustworthiness
A limited company structure's professional status will add valuable prestige and credibility to your business. In fact, certain businesses and agencies (particularly in the information technology, finance, and construction industries) will only engage with other incorporated businesses. This is typically due to the high level of risk associated with the contracts they award.
If you're dealing with sensitive data, complex IT projects, or large-scale construction contracts, for example, your clients will demand limited liability protection from all contractors because the associated risk is particularly high.
In most instances, sole traders are simply not regarded for these types of contracts, so forming a corporation can significantly improve your competitive advantage.
4.Pensions
Companies offer the option of investing pre-tax trading income in a company pension scheme rather than investing withdrawn income in a personal pension after deducting business and personal taxes.
5.Income distribution
You can issue shares to your spouse or family members if you own a limited by shares company. This allows you to divide your business profits and reduce your personal tax liabilities.
You can take advantage of your spouse's or children's tax-free Personal Allowance, basic tax rate, and £2,000 tax-free dividend allowance by paying dividends to them. This is extremely beneficial if you are the sole or primary wage earner and/or provide financial support to your children on a regular basis.
6. Opportunities for investment and lending
Because companies can have multiple owners, it is possible to raise additional capital by selling portions of the company ('shares') to new investors. Companies generally have more lending options than sole proprietors, and some banks will only lend to incorporated businesses.
Furthermore, it is frequently possible to secure a loan for a company without requiring shareholders or directors to provide security against their personal property.
7.Professional standing
When you start trading as a limited company, your professional status and image will significantly improve. While your business's activities, ownership structure, and internal management may be the same as when you were a sole trader, companies are held in much higher regard and make a better impression.
The perception difference is largely due to the fact that incorporated businesses are more closely monitored. Limited companies have more complex accounting and reporting requirements, greater statutory compliance obligations, and their corporate details and accounts are published on public record, where other businesses and members of the general public can inspect them.
A more professional image, combined with the advantages of corporate transparency, could also be advantageous in many other ways, such as:
attracting new customers and investors gaining access to a broader range of lending opportunities
expanding into new markets or locations
establishing a valuable and trusted brand identity while competing on an equal ground with other businesses in your industry sector
8.Tax planning and efficiency
Limited companies in the United Kingdom currently pay only 19% Corporation Tax on profits, whereas sole traders pay 20-45% Income Tax on profits. This gives you more options for tax planning.
Investing surplus funds
Instead of withdrawing all available profits each year and paying additional personal tax on top of your Corporation Tax liability, you can keep surplus income in the business to cover future operational costs and growth. This is preferable to withdrawing all profits, paying higher income tax rates, and reinvesting your own funds when the business requires additional capital.
Personal income deferral
Profits can be deferred until a later tax year when a lower rate of business or personal tax is due.If withdrawing all available profits would place you in a higher Income Tax or Dividend Tax bracket, this is an effective strategy.
9.Increased personal remuneration
By forming a corporation, you can reduce your income tax and National Insurance contributions (NIC) by taking a salary and dividends. You will not have to pay any Income Tax or employee Class 1 National Insurance on your director's earnings if you keep it below the NIC primary threshold. Furthermore, because wages are a tax-deductible business expense, the company will incur no Corporation Tax liability on the salary.
The remainder of your earnings are available as dividends, which are paid from profits after Corporation Tax has been paid. You will be eligible for the annual £2,000 Dividend Allowance (2022/23 tax year), which means you will not have to pay any personal tax on the first £2,000 of dividend income. Above that,Dividend tax will be due if your earnings exceed this amount. Dividend tax rates, on the other hand, are much lower than income tax rates.
Depending on your annual profits, operating as a limited company rather than a sole trader could save you hundreds to thousands of pounds in tax each year.
10.Legally distinct identities
A limited company, unlike a sole proprietorship, is a legal 'person' in its own right, with an entirely separate identity from its owners and directors. As a result, businesses can enter into contracts in their own names and are personally liable for their debts and liabilities.
The owners are only liable for the value of their unpaid shares or personal guarantees, not the entire amount of the company's liabilities. When a company declares bankruptcy, it is the company itself that is declared bankrupt, not the shareholders or directors.
Furthermore, companies have perpetual succession and survive the death or ownership of the original members. The company can be sold or transferred to another person at any time, allowing the company to continue operating with minimal disruption to customers and employees.
I am shocked to see how easy this process was literally taking me less than 10 minutes. it's Saturday.I have already received confirmation of my company being registered and my tide business bank account on its way! I have set up a business bank account with Barclays in the past it took upto 1 month for the set up process. Thank you 😊 looking forward to receiving my card.
Once again very helpful. I am currently a sole trader. I think it would be a smarter move if I register a limited company. At least that way I don't need to worry about my personal assets such as my home for my kids and wife.