Advantages of a Limited Company

There are several advantages of a limited company which we will explore here. However, when starting out as a contractor, the first step is choosing the best company structure to suit your business; this is often a limited company, but not always. The most common choices are: sole trader, an umbrella company or setting up your own limited company.

According to Companies House over 500,000 limited companies are formed each year… here we list the top reasons as to why; and whether harnessing the advantages of a limited company might be right for you…

Let’s start at the beginning… what is a Limited Company?

The structure of a limited company means the company is legally separate from you, the owner/s. The company will have its own identity, and your personal finances will be treated separately to that of your business. This is because you will have limited liability, sometimes referred to as a ‘veil of incorporation’. This means that should there be any financial problems within the business, your personal assets are protected. This is provided that you have acted at all times in good faith as a Director.

This is in contrast to working as a sole trader, where you and your business are considered one and the same. All transactions for the business can be made personally, however all personal assets can then also be pursued should you experience any financial difficulties.

What are the advantages of a Limited Company?

Exactly that… you have limited liability!

Peace of mind comes with limited liability. As mentioned above, having limited liability means that if the company incurs any problems, then that issue is against the company; and your personal assets and finances are protected. You and your business are considered separate entities.

You’ll have greater tax planning opportunities – greater take home pay!

This means that you can legitimately pay less personal tax than if you were a sole trader. Many people see this as the biggest advantage of running a limited company. This benefit is dependent on earning a certain amount, so be sure to check the numbers through before making a decision.

A limited company pays Corporation Tax at 25% (19% for small businesses with a profit under £50,000) as opposed to the 20%-45% income tax that sole traders pay on their profits. Many directors pay themselves with a small salary and a higher dividend – this is the most tax effective combination for a number of reasons. . .

You can pay yourself through a combination of salary and dividends

A dividend is the payment of profit from a limited company to a shareholder. For ordinary shares, the amount of dividends a shareholder can receive is based on the percentage of shares they own, for example, if you are the only shareholder you’ll receive 100% of each dividend.

• You don’t pay national insurance on dividends
• You can minimise your personal tax liability (depending on how many dividends you pay yourself)
• Taking a salary automatically triggers a national insurance record for your state pension
• Your company can claim the cost of your salary when it calculates its corporation tax which means a saving for the business
• You can pay yourself in dividends up to the level of post-tax profit in the company (i.e. up to the level of money remaining in the company after all business expenses and liabilities, including tax and VAT) have been paid.

Here at Integro we’ll be able to advise you on the best plan to put in place to maximise this tax benefit; and also guide you as to when would be most beneficial time to move funds from your business. Further information on dividends can be found here: Contractors Guide to Dividends.

You can claim a large range of business expenses

This is considered one of the top advantages of a limited company due to the fact that it reduces the amount of corporation tax that a company pays on profits.

In fact, one of the biggest advantages of a limited company is the lower rate of tax you’re liable for – and claiming for all the expenses that you’re entitled to is one way to improve your tax efficiency further.

As a limited company director you can claim for such things as annual staff parties, pension contributions, your accountancy fees, to name a few. Take a look at our limited company expenses guide for further information on allowable company expenses.

Your business may appear more credible

Rightly or wrongly, in some industries, there seems to be a natural assumption that limited companies are more professional. Particularly if your business tends to deal with larger companies, they will often prefer to deal with limited companies over sole traders or partnerships.

This may lead to greater business opportunities that you might otherwise not have had if you weren’t a limited company.

In a similar vein, if your business wants to borrow money, some banks will only lend to limited companies. In addition, you might also be able to secure a loan without directors or shareholders providing security against their own personal property as your company is legally a separate entity.

A protected trading name

When you set up a limited company you get to choose a name, absolutely one of the fun parts! Once your name is chosen and registered with Companies House it is yours and yours alone – nobody else can set up another limited company using the same name or anything considered too similar. The name is also protected by law.

Ready to set up your Limited Company?

If those advantages of a limited company sound attractive to you, it’s pretty straightforward to set up your limited company.

You can get started by completing our Company Formation page here. Or have a chat with us and we can advise you on all the things you’ll need to do and the best time to do them. Call us on 0207 0962659 or book a call back request with one of our friendly and highly experienced accountants.

For an immediate overview of your next steps, take a look at our handy article about setting up a limited company here. Alternatively, if you are still finding yourself unsure on the best company structure for you, read our first time freelancing guide to help make your decision.