What are the advantages of a limited company?

With over 1.8m limited companies operating in the UK today, compared to 3.3m sole traders, we look at the advantages afforded to business owners who decide to trade via their own limited companies.

Limited company advantages

• The limited company model is typically the most tax efficient business structure to use. Dividends are subject to dividend tax, and not National Insurance Contributions, which means that company directors are taxed more leniently than sole traders or traditional employees.
• A limited company is a distinct entity, which means that the liability of its directors is limited. The business and personal affairs of sole traders are counted as one single entity for tax purposes, which means that sole traders are personally liable for business debts, unlike limited company directors.
• In some industries, having a limited company is more the ‘norm’, especially in professional fields such as consultancy. It can provide a professional image for many businesses, and in some industries, it is a mandatory requirement to be incorporated.
• Limited company directors may find it easier to raise funds for their businesses than sole traders.
• You can create different classes of shares, which is useful when seeking outside investment or for tax planning purposes.
• If you want to attract investors or business angels, you will almost always need to be operating via a limited company to be taken seriously.
• Once you register a company, your company name is legally protected via Companies House. There is no such protection for business names used by sole traders.
• Succession planning – if you want to pass your business on to your family in the future, it is easier to transfer an incorporated asset than a sole trader business.
• As a limited company director, you have more freedom to decide when to distribute company profits for shareholders, which may help with your personal tax planning. For example, you may decide to retain funds in the company until the start of the next tax year, in order to minimise your exposure to higher rate taxes if you have enjoyed a particularly profitable year.
• The cost of setting up a limited company is very modest. You can either incorporate on your own (direct via Companies House), or use a formations agent to complete the entire process for under £100.
• You can set up an executive pension via your limited company. Contributions are tax deductible, which is not the case for individuals.

There are some perceived disadvantages to incorporating – such as the increased administration required of directors, the cost of preparing annual accounts, and the legal and statutory obligations carried by directors, but most company owners would say that these ‘cons’ are vastly outweighed by the ‘pros’.

HMRC published an interesting piece of research which highlights business owners’ attitudes towards incorporating – what their main motivations were when they formed their companies, and the main drawbacks described by business owners.

If you need help deciding whether to set up as a sole trader, or form your own company, make sure you run through your options with a limited company accountant or another professional adviser first.