What Are The Main Advantages Of A Limited Company

When you are a sole trader, there are many reasons why you may opt to become a limited company. Here are the advantages of being a limited company.

What is a limited company? 

A Limited Company is a term used to describe a type of business organisation structure where the owner’s individual and personal assets and income are kept separate from those of the business. From a legal standpoint, the individual and the business are treated as separate entities. Whilst this provides a layer of protection to the owners, the downsides need to also be considered. For example, any money the business makes cannot be taken out whenever the owner wishes as the money belongs to the company as opposed to the individuals.

Limited companies also have to file yearly accounts and a confirmation statement to Companies House which will be available to the public. They will also be subject to paying Corporation Tax. The additional administrative tasks involved in being a limited company can be time-consuming and more complex than being a sole trader and therefore the decision needs to be made carefully.

Advantages of being a limited company  

Whilst there are some potential drawbacks, there are many reasons why a business will opt to be a limited company. The advantages of being a limited company include:

Limited Liability  

This is one of the main benefits of being a limited company as it means the company is seen as a separate legal entity from the individual owner. The owners will not be personally liable for any of the company’s debts which provides an additional, much sought-after layer of protection and security. The owner’s liability will only apply when it comes to the values of any shares they have in the company.

Low costs to set up  

It doesn’t cost a lot in order to make your company limited. It only costs £12 for a company to apply online and the process only takes a few hours to complete.

Tax Efficiency  

One of the main reasons why limited companies are so popular is the tax efficiency that comes with it. Directors of limited companies can take a small salary from the company and have the majority of their income come in the form of dividends. This approach helps minimise National Insurance Contributions.

Limited companies will also have to start paying Corporation Tax. This is currently 19% of the business’ profits. Sole Traders, on the other hand, have to pay between 20-45% income tax on their profits. This significant difference allows owners of limited companies to take home a higher proportion of their earnings.

Business Transfer 

Limited companies are able to be easily transferred to someone else if and when necessary. If an owner decides to sell or can no longer run the company it is a much simpler process to transfer the ownership than if they are a sole trader. This is mainly because the company, as opposed to the individual, owns all the business assets including their name and intellectual property.

Business name protection  

Becoming a limited company provides an additional layer of protection for the business name which isn’t there when you are a sole trader. This is due to the fact that all limited companies need to register their business name at Companies House. No one else will be able to trade under this name once it is registered. When companies share names it can lead to difficult scenarios. Consumers can get confused about the companies and if the other company with the same name doesn’t have the same standard of professionalism or reputation, it can negatively impact your company.

Financial Opportunities 

More funding and investment could be available for limited companies. Shares can be sold to interested parties and obtaining a bank loan can have a higher chance of being successful if the company is limited. This is due to the increased transparency of business records and the reduced level of perceived risk compared to a sole trader.

Better Reputation  

Being a limited company comes with the benefit of an improved reputation and more credibility. This is due to people often associating limited companies with professionalism. This in turn helps them form a more trusted view of the business and brand. Large companies and clients are more likely to opt with working with other limited companies as well as opposed to sole traders. Whilst this is not the rule, sole traders could be missing out on lucrative deals by not opting for the limited company structure.

Limited companies are more strictly monitored due to the increased accounting records and reporting that needs to be completed each year. Certain financial information is also made available to the public, making it a lot more transparent and leading to more trust.

Pension Contributions  

If the company is limited, the company itself can make pension contributions to all the employees. These payments tend to be tax deductible and can lead to a corporation tax relief. To ensure you are making pension contributions in the most tax-efficient way, ensure you turn to a professional for tailored advice.

Claim company expenses 

Company purchases such as travel and office equipment costs can be claimed as a business expense for limited companies but not if you are a sole trader. These costs can quickly add up and if they are being made regularly, owners should explore the limited company route.

Deciding on a business structure that works for your company can be a challenging task. Whilst there are many advantages to being a limited company, it is not always the best option- especially if the company is not making a lot of money currently. People may want to continue being sole traders until their revenue increases. If you do want advice on what structures are available and whether being a limited company will work best for you, then please get in touch with a member of the Wright Vigar team.