If you’re making the move into self-employment, one of the key decisions you’ll need to make at the start of the process is what the operating structure of your business will be.
The vast majority of self-employed people will either operate through their own private limited company or as a sole trader.
What is a Private Limited Company?
Unlike a sole trader business, a private limited company is a type of business structure that is a separate legal entity from its owners. A private limited company is incorporated which means its registered with Companies House and has directors and shareholders. The company director has responsibility for the day-to-day running of the business and ensuring compliance, and the shareholders own the business.
Accounting and reporting obligations are more onerous for private limited companies and they must file yearly accounts, a confirmation statement to Companies house which are on public record, as well as a Corporation Tax return.
What are the Advantages of a Private Limited Company?
There are advantages and disadvantages of operating through a private limited company as well as through personal ownership, and the decision on the best business structure can be a difficult one.
The majority of our clients operate through private limited companies. To give you some further insight why, read on for a breakdown of some of the limited company advantages.
Limited Liability Gives Financial Protection
Limited liability is a key benefit of the private limited company structure and a big reason why many people choose to operate this way.
Private limited companies are separate legal entities from their owners which means there’s a clear distinction between business and personal finances. Private limited company owners don’t have personal liability for any debts incurred by the business should it run into financial difficulties. Their liability is limited to the value of shares they purchased upon setup.
This provides financial security and mitigates the risk to you as your personal assets, such as your house, investments or car, aren’t at risk from creditors.
If you operate as a sole trader, you and your business are the same legal entity which means you’re personally liable for any debts incurred by your company.
Better Tax-Efficiency Can Increase Your Take Home Pay
A big reason that a private limited company is such a popular business structure is due to the opportunities it presents for tax-efficiency. As the director of your limited company, you can pay yourself a small salary and supplement your income in the form of dividends.
Dividends are company profits that are distributed amongst shareholders after tax, and a lower amount of tax is levied on them compared to income tax on salary. This means that with the right structuring of your remuneration, tax savings can be made which means an increase in take home pay.
As a sole trader, you don’t have the same tax leverage and will pay a higher income tax rate between 20% and 45% on your profits on earnings of £12,571 and above.
You can also make tax-deductible pension contributions through your private limited company so you can plan for the future while also getting Corporation Tax relief.
Claim On Allowable Expenses
When you operate through a private limited company, you’re able to claim a wide range of allowable expenses that have been wholly and exclusively incurred for the purposes of running your business.
Examples of allowable expenses include travel, accommodation and subsistence costs, the purchases of computer equipment and mobile phones, training, stationery, business entertaining, insurance and more.
You can deduct these expenses from your company’s income before your Corporation Tax liability is calculated. This reduces your taxable profit which means a lower Corporation Tax liability and more retained earnings in your business.
There are some allowable expenses that you can claim as a sole trader, but not as much as through a private limited company so the scope for tax savings after incorporation is bigger.
Protect Your Business Name and Brand
When you register your private limited company with Companies House, you need to register your business name and doing this affords protection to both your company name and brand.
The name you choose must meet Government guidelines and it must also be unique. This means that other incorporated businesses can’t have the same business name as you. If a competitor chooses a company name that’s similar to yours, you can raise an objection with Companies House and your competitor will have to change it if Companies House deems it to be too similar.
If there was another business with the same company name as yours, or even a similar one, people could confuse them. If your competitor had a bad reputation, your company name would be associated with theirs and it could cause harm to your brand and reputation.
There’s no register of business names for sole traders, and as such they don’t get the same level of protection that private limited companies. This makes it easier for limited companies to build a trustworthy brand with a strong reputation.
You can check the availability of your chosen limited company name on the Government website.
Better Perception of your Business
Private limited companies benefit from an improved image and credibility compared to sole traders. Incorporation presents an image of stability and professionalism which means people will have more trust and confidence in your business.
Private limited companies are more strictly regulated and monitored than sole traders with extra accounting and reporting obligations. Their business information is also available in the public domain which means there’s a greater degree of accountability and transparency, and ultimately a more professional image.
Clients in some sectors will only work with incorporated businesses meaning that if you operate as a sole trader, you could be missing out on potential work.
Private Limited Company Accounting With Gorilla
Finding and appointing the right limited company accountant is a big decision, but it’s one that can save you stress, time and money! Our limited company accounting package will ensure that all your business and personal accounting needs are met and is great value with a fixed monthly fee of £110 + VAT. We know that every limited company is unique, so you will receive a personal service that’s tailored to you with the UK’s most trusted accountants.
You’ll work with your own dedicated accountant who will get to know your business from top to bottom. They will be on hand to provide you with unlimited support and advice including support on running your limited company, maximising your allowable expenses, structuring your remuneration in the most tax-efficient manner, and much more!
Thanks to our Client Service Guarantee, slow turnaround times to your queries will never be an issue. If you contact us with a query before 3pm, we will respond the very same working day or we will issue you with a £50 payment.
You’ll also receive full access to industry-leading cloud accounting software, FreeAgent, at no extra cost. FreeAgent is trusted by over 100,000 small business owners and is a gamechanger with a host of automated features and insightful real-time reporting. Your tax returns can even be calculated in the background while you work based on the information you input throughout the year and can then be electronically submitted to HMRC.
Running your own limited company can be time-consuming and stressful. With Gorilla we ease the pressure giving you peace of mind that your accounting and tax obligations are in order and that your business is running as tax-efficiently as possible. We’ll also free up a significant amount of your time which can be redirected to core activities and business growth.
If you’re a sole trader that’s looking to incorporate, our Company Formation Service will handle the process for you from start to finish. If you have any queries about our limited company accounting service, please speak to an accountant on 0330 024 0406 or request a callback. To join Gorilla, you can complete our online application form here.
