The 7 advantages of a private limited company: An up to date guide.
Advantage 1 – You pay less tax and National Insurance Contributions
What are the advantages of a private limited company?
In the UK, the majority of self-employed people operate as sole traders.
In this article, we’ll look at the advantages of operating as a private limited company to see how it could benefit you.
If you’re interested in seeing whether a limited company could be a good option for your business, check out our business structure guide. If you’re already operating as a sole trader, and are thinking about making the jump to a limited company, the transition process is simpler than you think.
Advantage 1 – You pay less tax and National Insurance Contributions
Who can turn their nose up at the prospect of increased take-home pay?
Well, that’s the principle benefit of setting up a limited company, and one of the main factors that drive people to switch from a sole trader.
As a director of a limited company, the way you pay tax is different from how you pay as a sole trader.
As a sole trader, you’ll pay 20% or more on everything you earn over the tax threshold. As a limited company, you typically pay yourself a small salary, so you incur as little personal tax as possible. The majority of your income will come in the form of dividends. These are taxed at a lower rate, which means you’re able to maximise your take-home pay.
In addition to the tax benefits, paying the majority of your income through dividends means that you’re able to pay less National Insurance contributions (NICs) as these do not apply to dividend payments.
Here’s a quick comparison of the difference in take-home pay for a sole trader and a limited company.
- Sole Trader
Tax at 20%: £5,300
Class 2 NIC: £158.60
Class 4 NIC: £2,655
Take-home pay: £30,886.40
- Limited Company
Corporation tax: £5741.04
Dividend tax at 7.5%: 1,406.92
Take-home pay: £ 31,852.04
In the above example, you'll save £965.64 if you're operating through a limited company.
Advantage 2 – Your liability is limited
While many turn to a limited company for the tax benefits, some would argue that the peace of mind that comes with it is just as important.
We all know that risk comes with the territory when you run your own business. However, there are ways to minimise your risk as a self-employed person. With a limited company, you’re protected from any debts the company may incur should your business become insolvent.
Limited companies are their own legal entities; from a legal standpoint, the individuals that make up these companies are not deemed personally liable for the debts of the company. Your responsibility for your company’s debt is capped at the number of shares you own in that company.
Imagine you’re running a limited company, and you have a share capital of £2000.
You decide to take out a loan of £5000. However, things take a turn for the worse and you’re unable to keep up with payments.
If your company continues to defer on the loan payments, your company will be charged with non-payment of the interest on the loan, and non-payment to your creditors. In line with the law, your company will be dissolved - but you’ll only be liable for the number of shares you hold. In this case, that amounts to £2000.
Do note that there are exceptions to this rule.
If you’ve signed a personal guarantee, or if your creditors lose money due to fraudulent activities you've carried out as the company director, your liability won’t be capped, and you will be personally liable for the debt.
By contrast, sole traders do not enjoy the same protection. If you run into trouble as a sole trader, your liability is essentially uncapped. This could put all your personal assets at risk.
Advantage 3 - Increased credibility
A limited company gives you an edge when it comes to credibility and professionalism. Limited companies are deemed to have a more prestigious business statues, which can help you get off on the right foot
In fact, it's not uncommon for more established organisations to specify that they'll only work with limited companies or contractors operating through limited companies, and not sole traders.
Advantage 4 – Easier funding
A limited company is a separate legal entity from its directors, which presents less risk to lenders. While sole traders are still able to access funding, they would likely receive higher lending rates.
And while limited company directors who aren't keen on lending have the option of self raising funds through selling company shares, this isn't possible for sole traders. The latter would need to raise funds through their own personal means.
As a limited company, you could also be eligible for the following venture capital schemes:
- Enterprise Investment Scheme (EIS) – A scheme to help you raise funds for your business by granting investors tax relief on shares they buy in your company. To be eligible, you must receive investment within seven years of your first commercial sale. Eligible investments are capped at £5 million per year.
- Seed Enterprise Investment Scheme (SEIS) - A scheme to help you raise funds for your business by granting investors tax relief on shares they buy in your company. This scheme is for companies that have just started, or yet to start trading, and is capped at £150,000
Advantage 5 – Protecting your name and your brand
Once your company name is registered with Companies House, it is legally protected. This means that your business name can’t be used by another company, which helps to protect your brand from incidents like brand copying or imitation.
Before you decide on a company name, use the name availability checker on the Companies House website to see if your preferred name is available.
Advantage 6 – Easy to transfer ownership
A transfer of ownership is much easier to complete for a limited company, than it is for a sole trader.
Should the following circumstances arise:
- You want to transfer the ownership of the business by selling your shares
- You decide to cease trading
- You pass away,
You or your executor will be able to transfer all aspects of the company to someone else easily. This is due to the share structure of limited companies, and how it affects ownership.
If you’re the sole director of a limited company, you’ll likely own all the shares. If a limited company has more than one shareholder, this means that there are several individuals who own parts of the company through their individual shareholding.
Whether you own all or some of the shares in a limited company, it’s relatively straight forward to change the ownership of those shares to someone else.
Advantage 7 – You can claim a wide range of expenses
One of the biggest advantages of a private limited company is the lower rate of tax you're liable for - and claiming for all the expenses you’re entitled to is one way to improve your tax efficiency.
As a limited company director, you can claim for things like staff parties, pension contributions, your accountancy fees and much more. We've covered allowable expenses in greater detail in our our limited company expenses guide.
While many business owners will find that the advantages of a limited company outweighs its downsides, operating through this structure does come with increased administrative burden.
But that's something we can help you with (and if you decide to sign up, we'll help you set up your limited company at no cost!). Do check out our accounting packages, or book a free consultation with our accountant.