5 Advantages of Setting Up a Limited Company in the UK
When establishing an enterprise, one requirement is to choose the type of business entity. While more people operate as sole trades in the UK, there are many reasons for setting up a business as a private limited company. So, what is a limited company, and why should you consider forming your business as an LD? This is one of the business structures that allows you to create a business as a separate entity.
It gives your business a professional edge and takes home more money through tax exemptions. If you are interested in setting up your business as a limited company, here are some benefits of operating as a separate business entity.
1. They have a tax advantage
A limited company in the UK pays less in taxes than a sole trader because of the tax benefits. It is one of the primary reasons why certificate of incorporation is important compared to a sole trader. With an incorporated business, you enjoy low tax payments. For example, you can transfer personal income into dividends and enjoy tax allowances. Since they tax dividends and salaries differently, you will enjoy tax advantages.
You only have to pay corporate tax, which is lower than the income tax rates for sole traders. For example, a limited company will pay 19 percent corporate tax on profits, while sole traders pay 45 percent income tax on their earnings. The tax advantage for limited companies offers flexibility for tax planning, where you can reinvest surplus cash or defer personal income. By establishing the business as a legal entity, you can also earn money by taking dividends.
2. Limited liability protection
Apart from the tax benefits, limited companies are their legal entities and enjoy this protection. The most significant advantage of running your business as a limited company is that it wants liability protection, which means the company pays off any financial losses made by your business. You are not personally liable for any company debts or losses since they are treated as separate legal entities.
Also, shareholders can only contribute according to their nominal value in case of losses. They have no legal obligation to pay more than the little value of the unpaid shares if the company becomes insolvent. The extent of an owner’s liability entails the amount of money paid for their shares from any unsecured loans.
Hence, this business entity can protect your finances by ensuring your assets are not affected when the business incurs costs. In addition, you are protected from any debts a company may incur whenever your business becomes solvent. This differs from a partnership or sole trader where you are not protected from business losses or debts.
3. Access to finance
It is easy to get funding for a limited company because of its directors’ separate entity. While sole proprietorship entails relying on personal assets to raise capital, a limited company can use other forms such as shares and dividends. Most companies have multiple owners, making it easy to raise additional money by selling business shares to new investors. A limited is considered a separate entity by UK law, making it a tradable product.
In essence, an incorporated company has access to more lending opportunities and a better chance of getting bank loans since it presents lower risks. It is possible to secure a loan for your limited company without getting security from your shareholders or directors. A company can also borrow money from a bank without needing a personal guarantee from directors.
4. You protect your name and brand.
Limited companies offer brand protection by creating a professional and corporate image. This brand adds valuable prestige and credibility to your business. It helps boost the value of your business when competing with sole proprietors. More industries will do business with limited companies because of the corporate name and professional status.
As part of the company formation process, the business name is placed on the official register of companies. This means your name and brand are protected by UK law and held in much higher regard. This difference in perception is based on the structure of incorporated businesses. For example, they have more complex accounting and reporting requirements and publish their accounts on the public record for inspection.
5. Easy ownership transfer
A limited company has a separate legal identity, making it possible to change directors and shareholders. A business owner can choose to leave the company and appoint other people as owners. You can also sell your enterprise to new investors as you move to other ventures. The company will only cease to exist if you formally dissolve or liquidate it. This provides legal security for employees.
When you form a limited company, it means the business has permanence and is committed to responsible management. This can create the credibility to work with suppliers and customers. A separate legal entity means the company is independent of its directors and owners. Hence, it can enter contracts within the legal entity and owns its debts and liabilities. It can also enjoy perpetual succession and survive the death of ownership change. You can sell or transfer the business to other people.
The Bottom Line
Although sole traders are commonly preferred to run a business in the UK, there are many advantages of operating your enterprise via a limited company. The advantages of a limited liability company in the UK outweighs its downsides. We have highlighted five of the best benefits a limited company will give you compared to working as a sole trader.