Advantages of running your business as a limited company
If you're looking to start a business in the UK, one of the first things you'll need to decide is the type of company you're going to form. One of the most popular structures has always been that of a limited company, and there is a very good reason for that. Here is a helpful list of the benefits that you could have if you run your business as a limited company.
By far, the biggest and most compelling reason for choosing to set up as a limited company is, as the name would suggest, the limited personal liability you'll be held accountable for should allow the firm to run into trouble. As limited companies are treated as a separate legal entity, in the eyes of the law, it is responsible for any legal claims, losses, or debts - meaning the owners and their possessions are protected by the so-called 'corporate veil'. Thus, in the event of problems arising with the company, the owners (normally directors, shareholders, or guarantors) will only have to pay the value of the shares they hold in the company - with their assets (e.g., home, car, or other items of high value) remaining protected. On the other hand, should you choose to set up as a sole trader, there is no distinction between you and your firm - what the company owes, you owe - if there is legal action against the business, there is legal action against you.
Better tax savings and efficiency
At the time of writing, UK limited companies pay just 19% corporation tax on their profits compared to the income tax paid by sole traders, which can be between 20% and 45%. Not only are taxation levels considerably lower with a limited company - the structure allows you to reinvest the firm's profits to aid company expansion and growth rather than taking out more than you need and incurring higher rates of income tax. If circumstances allow, you can also defer withdrawing personal income to a later year to avoid crossing into a higher income tax or dividend tax bracket.
A limited company is an entirely separate entity
While you have a legal obligation to run a limited company diligently and professionally, the company itself is liable for any contracts it enters and is also responsible for any potential liabilities or debts it might run-up. This means, should the business run into problems further down the line, it - not you - will be held accountable. Also, as they are entirely separate from their owners, limited companies can pass from generation to generation or be sold to an entirely new owner should the original owners die or wish to move to another venture.
Many firms simply won't consider working with a non-limited company due to the high value or risks involved in their work. However, operating as an incorporated firm gives you immediate weight, kudos, and trust that can go a long way to winning new contracts.
Easier to attract investment
A limited company has more credibility and creditability, which makes it easier to attract investment in your business. If your business could benefit from having investors, incorporation could be an advantage, because as a limited company you may sell shares in your business to an investor relatively easily. On the other hand, sole traders cannot seek investment by selling shares.
Other factors to consider before incorporation
However, there are a few disadvantages to running your business as a limited company, particularly the paperwork and increased responsibility for making annual filings and tax returns. As a sole trader you are required to file a personal tax return each year to HMRC, but as a limited company you will also need to file your accounts, confirmation statement and a company tax return. As the director of the company, you will also need to file your personal tax return, and you will be responsible for carrying out the fiduciary duties required of company directors, including providing a duty of care and a duty of loyalty to the company.
Why incorporation beats trading as a sole trader
Despite the increased responsibility that comes with incorporating your business, there are great advantages in running your business as a limited company because a limited company is generally considered by clients and other businesses as a more professional or more credible business to work with than a sole trader.