The number of limited companies in the UK continues to increase over time as more and more people make the transition from traditional employment into self-employment.
When setting up your own business, one of the first decisions you’ll have to make is on your operating structure.
The business structure you choose will have different implications in terms of the tax you pay, your accounting and reporting obligations, not to mention your personal liability.
In the self-employed and contracting spheres, most businesses are limited companies or sole traders. The vast majority of our clients operate through a limited company, and in this blog post we’ll examine some advantages of a limited company structure to give insight as to why it’s so popular.
Better Tax-Efficiency
Operating through a limited company presents a significant opportunity to maximise your tax-efficiency compared with personal ownership. Everybody wants to increase their take-home pay, and this is a key limited company benefit and a big part of why it’s such a popular operating structure.
As director of your own limited company, you have significantly more control over your remuneration than through personal ownership, and you can structure it in a tax-efficient manner, assuming you are operating outside of IR35. For the 2023/24 tax year, you can pay yourself a salary at the National Insurance primary threshold of £12,570.
You can then supplement your income through dividends which are paid out of your company profit after corporation tax. Dividends are taxed at a lower rate than income tax against a salary, which means that with the right balance you can boost your take home pay. Be careful to not take a dividend that isn’t funded by company profits, however, as this is classed as a director’s loan which you will have to pay back.
Claim On Expenses
Another tax advantage of operating through a limited company is that you’re able to claim a wide range of allowable expenses. These expenses must have been incurred wholly and exclusively for the purposes of running your business.
Examples include travel and accommodation expenses, computer equipment, software, training, business entertainment, pension contributions, business insurance and more. You can deduct your allowable expenses from your company’s income which results in a lower corporation tax liability by reducing your taxable profit.
Pension Contributions
Rather than making pension contributions out of your taxed income as an employee of your limited company, your company can instead pay the pension contributions itself which is classed as an employer pension contribution.
As pension contributions made by your company are usually tax-deductible, this is a more tax-efficient way to pay into the pot as you will reduce your taxable profits and therefore your corporation tax liability. You also don’t have to pay employer National Insurance contributions which can further increase the savings.
Protection Through Limited Liability
Limited liability is one of the key limited company advantages and a big reason why it’s such a popular operating structure. From a legal standpoint, a limited company is an entirely separate entity from its owners.
This legal separation means there’s a clear distinction between your personal and business finances and you aren’t personally liable for any debts incurred by the company. The result of this is that your personal assets, such as your investments or home, are protected from creditors even if your business encounters financial difficulties and incurs debt.
This reduces the financial risk significantly for limited company owners, whereas sole traders are personally responsible for any debts incurred by their business.
Boost Your Company’s Image
Limited companies benefit greatly from improved credibility and status compared with sole traders. A limited company structure gives an air of professionalism and stability which will improve the perception of your business with clients and investors alike.
This is due to limited companies being more strictly regulated and monitored with additional accounting and reporting obligations compared to sole traders. In addition, because limited company information is publicly available, there’s a degree of transparency and accountability.
Incorporated companies are generally held in higher regard and in some sectors, businesses will only engage with limited companies. You could therefore risk missing out on new work by not incorporating.
Safeguard Your Brand
When you set up a limited company, you have to register your business name with Companies House. Once your limited company name is registered, this ensures nobody else can use it.
Your company name must be unique and even if a competitor tried to use a similar company name, you can place an objection with Companies House and if they deem it to be too similar, they will be unable to use it.
You work hard to build your brand and reputation so the last thing you need is another company piggybacking off this with a similar name. This could, after all, hurt your business if potential clients or customers confuse them, especially if they have a bad reputation or provide a poor level of service. There’s no protection, however, for sole trader business names.
If you’ve thought of the perfect limited company name but haven’t yet started trading, you can set up a dormant company. This means you can still register your name with Companies House to secure it for the future until you’re ready to start trading. Accounting requirements for dormant companies are minimal but there are some formalities that are required such as filing annual accounts and a confirmation statement with Companies House.
More Financial Opportunities
Limited companies have better prospects for attracting investment and obtaining finance compared to sole traders.
As a limited company you can raise capital by selling shares in the business to investors. Investors are generally more interested in limited companies due to the potential for both growth and scalability.
You also have a higher chance of obtaining funding such as bank loans, venture capital and business grants.
Working with a Limited Company Accountant
Despite the numerous advantages of limited companies, it’s also important to remember that you’ll have more reporting and accounting obligations than if you operated as a sole trader. But as expert Limited Company Accountants, Gorilla can take the admin burden off your hands. For only £110 + VAT per month, we’ll take care of all your accounting needs.
We’ll also provide unlimited support and advice from your own dedicated accountant, including how to improve your tax-efficiency. You receive full FreeAgent access and a same day response to your queries thanks to our Client Service Guarantee.
If you currently operate as a sole trader and are thinking about going limited, our Company Formation Service can have your limited company set up the very same day. If you’d like to know more, please request a call back or call us on 0330 024 0406.
