If you’re looking to start a business in the United Kingdom, there are two main business structures available to you: operating as a sole trader or forming your own limited company.
Limited companies, in comparison to sole trader ships, provide several professional and financial benefits, which is why the structure is increasingly popular even among those in trade sectors such as plumbing or carpentry that would have been sole traders previously.
If you’re undecided between the two or wondering whether to embrace a limited company as a freelancer: these are the most significant benefits of forming a limited company.
1. Personal Liability Indemnity
The security provided by the structure of a Limited Company is one of its most significant advantages for entrepreneurs. A limited company is one that has a restricted liability.
The separation of personal assets from company debts protects company owners’ personal funds in the event of a firm’s failure. This is because, under law, a small business has its own individual legal identity.
“The Corporate Veil” is another name for this separation, which refers to any debts, legal claims, or losses incurred by the limited company after it has become solely responsible for them and its owners, shareholders, or directors (unless a personal guarantee had been given to a company creditor).
Limited liability is particularly important if your limited firm will be delivering or providing high-value services. It’s critical to have this protection in the event of liability claims.
2. Professional Identity
Even if your company’s operations, management, and ownership structure are the same as they were when you operated as a sole trader, in general, a limited company business structure makes for a better first impression. As a result, limited companies are quickly recognized and may get investors on board to raise money more easily.
The majority of this is based on the word’s connotation. When people think about a company, they generally think of a rigorously examined entity that can be held accountable for both accounting and legal issues. As a result, since these duties are assumed by law, it is frequently regarded as more professional because of them.
In addition, businesses must be more open with their inner workings. Public records of corporate information, statutory compliance, and corporate accounts are available in full view to provide investors, funders, and customers the assurance they need to do business with a firm.
3. Efficient Tax And National Insurance Contributions
Limited companies in the United Kingdom enjoy considerable tax advantages. Limited firms pay just 19% Corporation Tax on any of their profits, as opposed to sole traders who might be required to pay anywhere from 20 to 45 percent in taxes. This significant difference allows for more tax planning flexibility.
Corporation Tax allows you to take a modest salary while still receiving most of your income from the business in the form of dividends if you are a limited company director or a shareholder of a limited company.
One thing to keep in mind as a limited company director is The Dividend Allowance. This allowance allows directors to enjoy an annual dividend income allowance of £2,000, so they won’t have to pay any personal tax on their first £2,000 in dividends. When the amount reaches £6,500, executives are responsible for paying Dividend Tax rates that are lower than Income Tax rates and may save thousands of pounds every year for a company owner.
Limited company dividends may be paid out in the same way as sole trader profits, saving your firm money. Because limited company dividends are not subject to National Insurance Contributions, you can cut your NIC obligations by limiting your income to just the dividend portion. As a single trader, all your earnings are subjected to National Insurance rules. As a limited entity, you have more choices and might make greater profits.
Furthermore, by reinvesting any surplus income, you may use this money to finance future growth or operational services. Because this extra cash is reinvested rather than paid in additional personal taxes, you won’t pay anything extra on top of your Corporation Tax obligation.
You may also postpone personal revenue by delaying the pay-out of profits to a future year, which might result in a lower personal UK tax rate. This becomes more helpful if the payout of profits would produce a greater income tax or dividend bracket in the current year.
Clients will usually want to work with contractors who provide limited liability protection if their company is likely to be handling sensitive information or working on major construction or IT projects for a variety of reasons.
When compared to limited companies, sole traders are often overlooked for projects like these due to a lack of professional and trustworthy standing that a business might provide. Adding prestige and validity to your position may be required depending on the sorts of services your firm will execute.
5. Separate Legal Entity
A limited company is regarded as a distinct legal entity from its founders, shareholders, and directors due to this feature. As a result, corporations may enter into contracts using their own name and are solely responsible for any liabilities or debt incurred as a consequence.
Because of this, the owners, founders, or directors are only responsible for their unpaid shares – which frequently start at £1 – or personal guarantees.
In the event of a company going bankrupt, this separation protects you and your assets. The firm will be declared bankrupt rather than the owners or partners, or if the business is required to be sold or transferred owing to the death or succession of original founding members.
Although a sole trader’s status protects him against financial claims if a firm fails since it is considered as one entity for tax and administrative reasons, such protection is unavailable in the case of incorporated firms. They have the potential to incur unlimited personal liability for their company debts and, in certain circumstances, may lose everything.
It protects the firm from disruptions in service and employees or clients by establishing a distinct legal entity and treating it independently.
6. Investment/Share Opportunities
A limited company allows for many owners to have access to shares. If the company becomes popular enough, shares may be offered to potential investors at a high price.
In addition, limited companies have easier access to financing since there is no requirement for public or private auditing. Some banks will only lend to firms that are incorporated, and several lenders may refuse you entirely based on your size. Directors and shareholders won’t be required to put up assets from their own property when obtaining a loan because of the separation of legal entities.
When you divide equity between families, your earnings and personal tax obligations are split. If you distribute dividends to your spouse or family member, you may benefit from their Personal Allowance, resulting in lower-rate taxation and a £2,000 Dividend Allowance.
7. Secure Trading Name
While it may appear to be a child’s play when it comes to legal and financial concerns surrounding your company, having a secure trading name is another significant advantage of forming a limited liability firm.
The name of your business is legally protected once it’s recorded with Companies House, ensuring that your firm may be the only one to use that name in the United Kingdom.
Another defensive measure is that if a firm or sole trader ship were to establish itself under the same name, they could harm your business activity if their work was of lower quality, or if they had built up a negative reputation.
8. Company Pension Scheme
Another major benefit of a limited company is a corporate pension plan. If you operate a limited company, a pension can provide significant tax advantages. Personal contributions to a pension may be subtracted from your business’s corporation tax payment, allowing them to qualify as legitimate business expenses.
If you operate your own firm as a limited company, you can contribute to a pension if you wish.
9. Easier Setup And Transfer Of Ownership
Finally, a limited company is simple to start-up and transfer ownership if required.
To become a limited company, you must submit personal information to Companies House including the type of work your business will do, the address where it will be registered, and how ownership of the firm will be structured. After this has been submitted, Companies House should typically activate your business within a few days.
On the other hand, in the event of retirement or additional circumstances, ownership is just as simple to transfer. Investors, clients, and equipment can all be sold or transferred to new investors and directors.
To conclude, there are many business and financial benefits to becoming a limited company. These benefits can provide your business with security and stability, as well as increased opportunities for growth. Remember to always consult with an accountant or solicitor to find the best route for your specific needs.