Being self employed (a sole trader) is the most common kind of business model in the UK. Don’t let this fool you into thinking it’s always the best decision, though. There are a range of advantages in setting up your business as a limited company, which you could be missing out on. Here are three of the biggest reasons to choose a limited company model.
First of all, there’s a big tax advantage compared to being a sole trader. In most cases, you’re likely to pay considerably less tax than you would operating as a sole trader. All companies are required to pay corporation tax. This was once divided into a ‘small profits rate’ and a ‘main rate’ with a 1% difference. Since 2015, both tax rates are set at 20%. There’s one thing which the director of a limited company can do, which a sole trader can’t. Directors may set their salary low, and take most of their income in dividends instead. By doing this, you can cut down the amount of NICs (National Insurance Contributions) you have to pay. This is because dividends are taxed in a separate channel to NICs, and not subject to them. A sole trader’s whole income is subject to NICs and their regulations. Therefore, running your firm as a limited company means you’ll take home a bigger chunk of your overall earnings.
As you’ve probably heard before, there’s less risk involved in running a limited company. The ‘limited’ in the term ‘limited company’ refers to your limited liability. Provided you don’t commit any fraud as a director, you won’t be personally liable for any losses the company makes. This means the personal finances and assets of any shareholders will be protected beyond their value. This comes into play if the limited company is unable to pay its debts. Each shareholder will only have to contribute according to the nominal value of their shareholding. Depending on the situation, this could be a fiver or less!
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By making your business a limited company, you’ll also give it a certain degree of professionalism. It’s amazing how much of a professional corporate image you can gain just from having “Ltd” under the name of your business. Services like Your Company Formations exist just to manage the founding of limited companies. Limited companies are considered more dependable, established and committed to their dealings. The limited liability of a limited company also gives off a sense of security. This is attractive to people who may be looking to hire your services or set up some long-term investment. Larger investors and companies are usually more inclined to do business with a limited company than a sole trader. So, running a limited company is generally the best option to encourage growth.
Hopefully this has given you a much clearer picture of how you’re going to proceed with your business. True, there are generally more accounting and administrative complications in limited companies. However, the financial and professional gains often make it all worth it!