What are the benefits of running a limited company?

Should you wish to incorporate a new company, one of the first challenges that you will face stems from choosing the company set-up. Often, people will choose to operate their business as a sole trader or a general partnership. However, with over 3.9m limited companies on the Companies House register across the UK, there are obvious reasons to consider following their lead.

Let’s take a look at what your business could benefit from if it chose to go down the limited company route.

Ease of set-up

For one, starting up a limited company is by no means as confusing as you may think. You can manage the whole set-up process online, meaning you no longer have the weeks-long waits from Companies House to verify your application. You could potentially complete your set-up, with the right information, in just a few short hours.

However, don’t just rush into the set-up process. While it’s easier to set up thanks to the Companies Act 2006, there are many reasons why you should take things a little slower. While in the past it was much more challenging to set up a company like this, a limited company does not take much longer than registering as a sole trader.

Reputational gains

Typically, your business will also benefit from a higher level of reputation when running a limited company. It’s often seen as a more long-term business option, with most long-term limited companies existing for many years. This helps to add another level of confidence to your business dealings, as your clients and partners will be more likely to deal with you.

Also, many larger businesses and suppliers may outright refuse to work with a business which is not a limited company. You also get to enjoy being the only company in the country with your particular name. Sole traders could have the same name as someone else; with a limited company you stand out as your business has a protected name.

Tax benefits

Of course, one of the main benefits from running a limited company is that you can potentially reduce your personal taxes quite significantly. Limited companies will see their profits taxed at UK corporation tax rates, currently at 19%. From 1st April 2020, this main rate will reduce to just 17%.

You could choose, as the director and shareholder of your company, to draw a lower salary and take the majority of your income as a dividend. This helps you to reduce National Insurance contributions by a significant margin. All your income as a sole trader, by contrast, is subject to National Insurance contributions. If you were to run your business as a limited company, then you will likely see significant gains from doing so.

Also, limited companies tend to have more expansive rules over the use of allowable expenses and reliefs. Tax deductible costs and allowances are often easier to offset against your profits. As ever, you should look to consult independent financial advice before proceeding.

Limited Liability

Unlike other business models, a limited company means that you have capped liability for business debts. Typically, your liability would be for the price of your shares, plus any unpaid amount on partly-paid shares. Most of the time, your liability will be for your shares as well as for any unsecured loans which were made to the company.

Compared with a sole trader or partnership, where you can have potentially unlimited personal liability for the debts of the business. Therefore, a limited company can allow you to take a calculated business risk without the fear of losing everything (e.g. your private residence). However, please note that if the shareholder is also a director within the company, limited liability may not apply.

Finding funding

Another benefit that you will receive when you run a limited company is an improvement to your financial opportunities. A limited company will typically be looked upon more favourably by an investor or lender. This will help you to secure more favourable business finance, meaning that you are likely to help your business grow and build accordingly.

If you are in need of help in securing long-term financial assistance, then finding funding is made much simpler through this system. If you are struggling with finding funding as a sole trader, moving instead to a limited company might open doors which were otherwise closed to you.

Pension assistance

Like any good business set-up, running your business as a limited company could help with pension opportunities. The company can make pension contributions, often allowing for you to make a higher pension contribution and still benefit from greater tax relief. All contributions will be seen as a tax-deductible expense for the company, also.

You should therefore find it easier for yourself to gain relief from Corporation Tax. Also, you will not have to pay any NICs, and contributions are generally not taxable for the employee.

Making the right decision

Of course, every business is different. What is written above may not apply to your business in certain circumstances. If you think this may be the case, then it pays to reach out and find professional assistance. Devonshire Green is here to help you with both the set-up of your limited company and to fully understand the pros and cons of limited company set-up.

If you are serious about making the most of your business, then it pays to explore every opportunity. The set-up of your business will determine a lot about how you are taxed and how you deal with the government. If you would like to make a more informed choice regarding what that decision might be, contact us today.

We can help you to evaluate whether or not setting up a limited company is the correct choice for your business.

Nick Bagga