For aspiring business owners in the United Kingdom, there are two popular choices: Either setting up a business as a sole trader, or forming their own limited company.
Figures from the close of 2019 showed that there were around 2 million trading limited companies throughout the UK, and this number is expected to rise significantly by the close of quarter four of 2020 due to the financial ramifications of the Coronavirus pandemic.
Limited companies offer many professional and financial benefits in comparison to sole tradership and this is often why they’re preferred, so we’ve compiled the main advantages of forming a limited company below.
1. Personal liability indemnity
One benefit entrepreneurs prefer about limited companies is the security aspect that it offers. A limited company’s liability is in its name – it’s limited.
This means that in the event of the business running into financial troubles, a business owner’s personal assets are secured and remain separate from the businesses. This is because in the eyes of the law, a limited company is a completely separate legal entity.
“The Corporate Veil” is another term for this separation and refers to any debts, legal claims or losses associated with the company being the sole responsibility of the company itself, excluding its owners, shareholders or directors.
If your business will be supplying or providing high-value services, limited liability is a crucial piece of protection to have in the event of liability claims being raised.
2. Professional identity
Even if the activities, management and ownership structure of your business are identical to how things were when you were perhaps a sole trader, in general companies make a better first impression and are therefore held in higher regard.
A majority of this stems simply from connotation. In general, the word company springs to mind rigorously monitored corporations who can be held accountable on both accounting and legalities, and are often deemed as more professional because of these responsibilities.
Additionally, companies in general have to be more transparent with their inner workings. Corporate details, statutory compliance regulations and corporate accounts being published on public records in full view offers security for investors, funders, or customers wanting to do business.
3. Tax and National Insurance Efficiency
In the UK, limited companies only pay 19% Corporation Tax on any profits, compared to sole traders who pay anywhere between 20-45% on theirs. This significant difference allows for greater flexibility when it comes to planning tax.
For example by reinvesting any surplus money, instead of paying more personal tax on top of your Corporation Tax liability, you can retain any surplus income the business makes and use that to pay for future growth or operational services.
Likewise, you can defer your personal income by deferring the withdrawal of profits to a later tax year which may offer a lower business or personal tax rate. This becomes especially effective if in the current year, the withdrawal of profits would result in a higher income or dividend tax bracket.
Read more: 9 Ways To Reduce your Corporation Tax.
If your business is likely to be handling sensitive information or working on large construction or IT projects, clients will usually prefer to work with contractors offering limited liability protection because of the risks that come with undertaking such work.
Sole traders are therefore often overlooked for these types of projects because they lack the professional and credible status that a company presents. Depending on the types of work your business will be completing, adding prestige and credibility to your status may be a necessity.
5. Separate Legal Entity
As mentioned above, a limited company is classed as a separate legal entity from its founders, shareholders and directors.
The result of this is that companies can enter into agreements under their own name and they handle the sole responsibility of any liabilities or debt if they were to be incurred.
Due to this the owners, founders or directors therefore are only liable for their unpaid shares – which often begin at a £1 – or personal guarantees.
This separation offers a range of protective benefits in the event of the company becoming insolvent, as the business will be declared bankrupt – not the owners or associates, or if the business needed to be sold or transferred due to the death or changing ownership of original founding members.
By being seen as a separate legal entity and being handled independently, it ensures the business can maintain succession and in the event of being transferred, continue to provide services with very little disruption to employees or clients.
6. Investment/Share Opportunities
A limited company allows for multiple owners, each that have access to shares. This can be a useful way of raising extra capital if the business was to become prestigious enough, as shares could be sold to potential investors at good prices.
Limited companies are also granted easier access to lending opportunities, and some banks will only lend to businesses that are incorporated. In the event of securing a loan, directors and shareholders will not need to provide security against their own assets due to the protection of separate legal entities.
Further reading: Directors Loans: What Are They and How Do They Work
7. Secure Trading Name
Whilst it may sound a whimsical thing when considering legal and financial decisions surrounding your business, having a secure trading name is another large benefit of setting up as a limited company.
Once your business name is registered with Companies House, the company name is protected by law which means that your business can be the only one to exist in the United Kingdom with that name.
This is another protective aspect as if a business or sole tradership was to set up under the same name, they could hurt your business dealings if their work was of lesser quality, or if they had amassed a bad reputation.
8. Easier Setup and Transfer of Ownership
Finally, a limited company is both easy to set up, and transfer ownership if circumstances were to require it.
To set up as a limited company, you need to supply certain personal details to Companies House such as the type of work your business will be undertaking, the address your business will be registered to, and the ownership structure your company will have. Once this is all received, Companies House will usually activate your business in a few hours.
At the other end of the scale, in the event of retirement or compounding circumstances, ownership is just as easy to transfer. Shares, clients, and equipment can all be either transferred or sold on to investors, or new shareholders or directors. At iFinance Department, we have years of experience helping entrepreneurs turn their dreams into reality by assisting them with all financial decisions involved in pursuing the setting up of a limited company or sole tradership. Our advice is invaluable, and we love to help where we can so contact us now for your free financial consultation.