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Why would you become a Limited Company?

in News

One of the main advantages of being a limited company business is that you are likely to pay less personal tax than a sole trader.  As a sole trader, your entire income is subject to National Insurance Contributions.  Running your business as a limited company could therefore help you to take home more of your earnings.

In becoming a Limited Company, there are both advantages and disadvantages.  Which option best suits you depends on your own circumstances.  It is important to look at the main differences between these two business structures.

Tax

The main advantage of your business being a limited company is that you are likely to pay less personal tax than a sole trader.

Limited company profits are subject to UK Corporation Tax, which for the current 2017/18 tax year is set at 19% and will be reducing to 18% from 1 April 2020.

If you are the director and shareholder of a limited company, you may choose to take a small salary and draw most of your income in the form of dividends.  By doing this you can minimise the amount of National Insurance Contributions (NICs) you have to pay.

As a limited company dividends are taxed separately, and are therefore not subject to NICs.

As a sole trader, your entire income is subject to NIC rules.

Limited Liability

Being a limited company means you have the reassurance of ‘limited liability’.

Assuming that no fraud has taken place, ‘limited liability’ means you will not be personally liable for any financial losses made by your business.  A limited company can therefore give you added protection should things go wrong.

Being self employed you would not enjoy such protection if things went wrong with your business.

Professional Image

In some businesses and industries, having a limited company can provide a more professional image.

If you are undertaking business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships.

Business Name

Once you register your company with Companies House, your company name is protected by law.  No-one else can use the same name as you, or anything too similar.

As a sole trader, it is possible someone else could trade under the same name as you, and you wouldn’t be able to do anything about it. This could damage your business, and in some cases, result in you having to go through the costly and time-consuming effort of changing the name of your business.

Shareholders

A limited company can issue various classes of shares. This means you can easily sell stakes in the company, or transfer ownership of shares.  If your limited company has more than one shareholder you should get a Shareholders’ Agreement.

Costs

Many people prefer to operate as sole traders rather than limited companies because the start-up and running costs are perceived to be significantly lower. However, you can form a limited company from as little as £15, so the price of setting up a company really is minimal.

Pensions

A limited company can fund its employees’ executive pensions as a legitimate business expense. This can offer a tax advantage over those who are running their business as self-employed.

Directors

Your company must have at least one director. Directors are legally responsible for running the company and making sure company accounts and reports are properly prepared.

A director must be 16 or over, but not necessarily live in the UK but the company must have a UK registered office address.

Directors’ names and addresses are publicly available from Companies House. You can stop your home address from appearing on the register if you or your family are at risk of abuse or harm because of your company’s work

What do I need to do?

To set up a private limited company you need to register with Companies House.

You will need:

Once you have these details, you can register your company.

Register for Corporation Tax

After you have registered your company with Companies House, you will need to register it for Corporation Tax.  This needs to be done within 3 months of starting the business.

You may get a penalty if you register late.

Should you have any questions relating to this article, please feel free to contact us on 01799 732188 or email abby@wilsonaccountingservices.com.




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