7 reason why you should register as a limited company
Starting a new business but unsure what is right for you? Here are a few benefits and drawbacks of registering as a limited company.Get an instant quote
You’ve decided to start your own business? Fantastic! Let us remind you, a decision on business formation should be taken with careful consideration and by no means overlooked as a mere formality.
The structure of a company plays an integral part in its daily activities. Choosing the right formation for your company will allow you reap many financial and professional rewards, whereas opting for a structure which isn’t suitable can lead to unnecessary strains.
In a pre-Covid world, Companies House report an average 5% rise in limited company registrations for the last 6 years – that is nearly 4.5 million registered companies. In a post-Covid world, experts predict this number to rise even further due to mass redundancies and new working conditions allowing employees to work from home.
But why is the limited company formation so popular for start-ups? Let us share some of the benefits of limited company formations.
1. Minimises personal liability.
All businesses involve a risk element and there is a possibility the investment may not perform as positively as one may have anticipated. The treatment of this risk is where company formations differ, a limited company will seek to insulate you whereas a sole trader will leave you out in the cold.
To put it simply, if your business runs into financial difficulties as a limited company, your personal assets will be secure, this isn’t the case as sole trader.
The business has an entirely separate legal identity to those who own/manage it. A limited company acts as a ‘corporate veil’, absorbing any losses, debts or legal claims made against it – as opposed to its owners.
This limited liability is a huge plus if you run a limited company as a director. Debts are capped to usually the amount invested, so if the business struggles for survival you will not be personally responsible for any losses beyond that point.
On rare occasions the ‘corporate veil’ is lifted and shareholders or directors can be personally liable, this is usually if it is deemed the company acted fraudulently. In these instances, you will incur unlimited liability.
By contrast, sole traders are offered no protection in the of event business failure. This is much riskier. There is no separation from you and your business, and you will be liable for any losses, debts and liabilities. Your personal assets can be separated from you to repay business creditors.
2. Tax planning and efficiency.
Ah taxes, one of the certainties in life! Although it must be paid, the amount paid can differ considerable depending on your business structure. Corporation tax for limited companies is 19% in UK, whereas this can be between 20-40% for sole trader profits.
Careful planning will see your business benefit from retaining cash which will then be reinvested into the business for future growth. This will avoid you paying additional income tax and reinvesting your own finances when additional capital is needed by the business.
3. Higher personal remuneration.
As a director for a limited company you can receive a small salary and majority of your income as dividends. Dividend payments are not subject to national insurance contributions and you will owe less tax.
You will benefit from your annual dividend allowance for £2,000 (2020/21 tax year), so you will not pay any personal tax on this. Any dividends paid after this will be subject to dividends tax, however these rates are still lower than income tax rates.
Remember, your salary is also business expense, therefore you will not owe any corporation tax on this.
In contrast, as a sole trader your entire income is subject to national insurance contributions, which can leave you considerably worse-off.
4. Credibility and reputation.
The professional status of a limited company structure inevitably adds credibility and integrity to your business. In certain industries, the level of risk involved is so great, certain companies only engage with other limited companies.
Limited companies can present opportunities which may not be available otherwise.
5. Protection of company name and brand.
Limited company names are unique, and no two businesses can operate with a similar or same name. We can help you to register your Companies House to secure your name.
Sole traders do not have the same privilege, they are powerless to others using the same trading name as theirs. Others can use the same name as yours but not provide an honourable service, it can lead to negative reputation and can hurt the business in the long run.
6. Investment and borrowing opportunities.
It is generally accepted a separate legal entity will find it easier to raise finance than a sole trader. Certain banks are only prepared to lend to incorporated businesses. Sole traders are more likely to use their own personal resources.
Limited companies can trade shares and attract investors to raise additional capital, however for sole traders this is more difficult.
7. Easier to sell business ownership.
If you wish to pursue new opportunities or even call it a day, it is much easier to transfer your business ownership if it is a limited company. The business has a separate identity and it is known what items are owned which can then be transferred.
As a sole trader it is more difficult to distinguish the difference between the business assets and personal items. Many items are used by the owner both personally and professionally, therefore do not have a specific identity.
Want to set up your own limited company?
If the reasons listed have appealed to you and a limited company is the right business formation for you, we would love to help.
Please get in touch and our team can arrange everything with Companies House for you. We will advise you of the procedures and talk you through step-by-step.