If you’re starting a new business, one of your first important decisions is choosing the right legal structure for your company. In the self-employed world, most people set up as either a sole trader or limited company.
The most popular choice would be becoming a limited company, so in this blog we’ll break it down for you, highlighting some of the pros of choosing to start your business as a limited company.
Limited liability
A limited company is a separate legal entity from its owners, known as shareholders. That means, unlike for a sole trader, you don’t have to worry about any personal assets due to the limited liability it provides.
The shareholders are not personally liable for the company’s debts or legal actions, reducing the financial risk that you are taking as Director, which is sure to bring you some peace of mind.
Tax-efficiency
As a limited company director, you have more flexibility in how you distribute profits to shareholders in various ways, such as salaries, dividends or through share buybacks. By choosing the most tax-efficient method of profit distribution based on individual circumstances and tax laws, you can optimise your overall tax liability.
Dividends are a perk of having a limited company, as it is paid out of your company profit after Corporation Tax. Dividend incomes are subjected to lower tax rates than ordinary income, which results in a greater profit for you!
Contributing to pensions
When a limited company makes contributions to pension schemes, these contributions are often treated as a legitimate business expense and can be a tax-efficient way to save towards your retirement. Instead of paying the contributions through your taxed income, you have the choice to pay it as an employer pension contribution through your limited company.
This is often tax-deductible and therefore reduces your Corporation Tax liability. All you would need to do is set up an agreement with a provider, and you can contribute to your pension and get complete tax relief.
Claiming expenses
Additionally, as a limited company director, you can claim on many allowable expenses. Allowable expenses are costs that are incurred wholly and exclusively for the purpose of the business. These can include a wide range of expenditures such as rent, utilities, salaries, office supplies, travel expenses, professional fees, advertising costs and more.
By effectively managing and claiming allowable expenses, limited companies can optimise their tax position and minimise their overall tax liability, contributing to improved financial performance and profitability.
Additional financial options
As a limited company, you will find yourself with more options financially.
For example, limited companies can raise capital by selling shares of ownership (equity) in the company to investors. Investors are also more often drawn to limited companies, due to their capability to grow as a business. Venture loans, business grants and bank loans are also a lot easier to get a hold of!
Improve company image
Another pro is that as a limited company, you gain credibility, naturally attracting bigger opportunities. Some large companies won’t do business with you if you are not a limited company, as the structure of the company gives you stability and professionalism that cannot be said for sole traders.
Limited companies are regulated, and their information is made available to the public, appearing more transparent and accountable, which many find appealing in a business they would want to work with. So you need to consider your aims for your company’s future when making your decision.
Safeguarding your brand
Registering your brand name, logo or other intellectual property as assets of the limited company can provide additional safeguards for your brand.
You must register your business name with Companies House. By holding these assets within the company, you can better protect them from infringement or misuse. Additionally, owning your brand assets through a limited company can make it easier to enforce your rights and take legal action against unauthorised use. For example, even if a company used a name too similar to yours, you could file an objection to Companies House and make it unavailable for use.
This is the best option if you want to secure your business’ originality and ensure that there is no chance your customers could get you confused for another business.
Has this helped? Or are you still not sure whether setting up as a limited company is right for you? Send us a message for our advice on what is best for your business.
