Benefits of a Limited Company
When you start your new business you may decide or your accountant may advise you to firstly register as a sole trader! Once established and depending on your turnover you might consider registering your company or part of the company depending on the type of business as Limited.
Why? There are three main reasons why!
Limited liability, Increased credibility and Tax Efficient
Limited Liability – What is says on the tin your liability is limited.
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. Creditors cannot touch your personal assets. You only stand to lose what you invested in the business. The only time a limit to your liability would be removed is if you are found guilty of wrongful or fraudulent trading.
If things go wrong with a sole trader or partnership, the owners are personally liable for all debt and liabilities of the business.
Increased credibility
You are likely to find that larger firms prefer to deal with incorporated businesses rather than sole traders.
If you are a contractor for example, clients will only work with you if your company is Limited.
Indeed some companies, especially in the financial services sector, require freelancers and contractors they use to have their own limited company.
Tax efficiency
As an owner/director the overall tax burden will be lower than a sole trader.
Key points
Limited companies pay corporation tax on their profits. The current rate is %19 as at 2022/23
Many company owners pay themselves a small salary and extract dividends you can extract dividends up to £2,000 before you pay any tax. Please refer to the tab Dividend’s, Distributing and dividend tax guide for further clarification on Dividends.
Significantly national insurance is not payable on dividends, but it is on salaries.
As a sole trader all your profits are subject to Nic’s
As a result of working via your own limited company you can take home a greater proportion of earnings after tax.
Note All corporation tax self-assessments (Form CT600) must be filed with HMRC online.
Other Benefits of a limited company
Protect your company name!
Once you register a company with Companies House, the company name is legally protected. As a sole trader someone else could trade under the same name as you and you could not do anything about it. This could damage your business and in some cases be costly if you have to register a new company name.
Access to finance is easier.
Securing funding can be difficult for all types of new businesses. You do not have the track record to demonstrate your risk to a lender. However, as a limited company is a distinct entity from its owns it may be a little easier to secure business finance than its sole trader equivalent.
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 shareholder’s agreement which outlines your various duties and responsibilities. It can also be used to detail what shareholders can and cannot do with their shares. This will prove invaluable should a shareholder want to exit the business. A shareholder’s agreement will also describe how to solve conflicts or issues, should things go wrong.
Tax relief on pension contributions
A limited company can fund its employees’ executive pensions as a legitimate business expense which means that pension contributions can be made before tax is calculated.
This provides another significant tax advantage over those working as a sole trader.
Planning for the future
Here are three key benefits a limited company offers when is comes to succession planning and protecting 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 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 a life cover personally.