Are you weighing up whether to set up a limited company or become a sole trader? This article covers some of the main advantages of opening a limited company.

This article covers:

  • What is a limited company?
  • Tax and National Insurance benefits
  • Business reputation
  • Access to finance
  • Protection for your business
  • Selling a business
  • How to set it up

What is a limited company?

Put simply, a limited company is a private company which is a separate legal entity to the owner.

The key thing to think about is the ‘limited’ aspect. Limited companies offer limited liability for owners. This means you will not be personally liable for all financial losses made by the business. The owner(s) are legally responsible for its debts, but only up to the value of how much they’ve invested. This gives you and your personal assets some added protection if things go wrong.

Benefits of a limited company

There are a number of benefits of opening a limited company, here are just a few.

Tax and National Insurance benefits

You can save a great deal on your tax bill compared to a sole trader. This will depend on personal circumstances, however. In most cases, you can take a small salary and the rest of your income as dividends to become more tax efficient.

Doing this will ensure you’re paying the lower tax rate on dividends (7.5% basic rate) rather than on regular income tax (20% basic rate).

Dividends are also not subject to NI which means you can save money while running your business.

Business reputation

Becoming a limited company can help to establish your reputation and credibility in the business world. Some clients and other businesses prefer to work only with other limited companies – some even going so far as to refuse to work with sole traders.

To avoid missing out on business, consider switching from sole trader.

Access to finance

It’s often easier to secure finance as a limited company as you are a separate legal entity. This means that many finance companies look favourably on limited companies rather than sole traders.

If you’re a sole trader, it’s your personal finances that loan applications rest on which might not be ideal if you have debts yourself.

If you are looking for investors, having a shareholder structure is often best and will help any investor feel a lot more secure in giving you money.

Protection for your business

A limited company gets a bit more protection when it comes to securing a trading name because it needs to be registered with Companies House.

Sole traders simply do not get that protection and if someone has a similar name, you can’t do a lot about it.

Selling a business

If the time comes when you want to part ways with your business or pass it onto a worthy successor, this is so much easier if you have a limited company.

If you’re a sole trader, you’re trading in your name and that’s not something you can really pass on very easily. A limited company is a separate legal entity so transferring ownership is a lot more practical and doable.

How to set it up

Incorporation is probably easier than you think. It will cost you a grand total of £12 to apply online. All you need to do is register with Companies House and HMRC and follow their step by step guide.

It’s always best to seek the advice of a qualified accountant who can guide you through this process and help you get incorporated. They will ensure everything is completed correctly and then you can start your business without any further worry.

To speak with an accountant, get in touch with Countplus today for a free quote.

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