Limited companies are seen as a large business but the truth is many limited companies are run by individuals. Becoming a sole trader is the easiest way to set up a business in the UK. Many people start out like that while they find their feet.
Sole traders are simply self-employed and every penny of the money they make after legitimate business expenditure is taxable. While it is flexible, there can be reasons to turn the business limited, especially if you want to grow your company and appoint directors.
There are many reasons for becoming limited, but here we list the five we think will help you if you’re thinking of becoming a limited company.
The profits of limited companies are subject to UK Corporation Tax, which is currently 19%. This can work out less than the tax a sole trader pays
If you are a director or shareholder of a limited company you may choose to take a small salary and draw the rest of your income as dividends.
By doing this you minimise how much you pay in National Insurance Contributions (NICs) and income tax.
But be aware that making the switch leads to more compliance work so you’ll need to be ready for putting in some extra hours. Finding an accountant will help make life as a limited company a lot easier.
2. Limited liability
Becoming a limited company means your liability is limited.
What that means is if anything goes wrong and you make financial losses you may not be personally liable for financial claims against you.
That said if you have done something fraudulent you will not be protected.
If you remain a sole trader, you would be liable to pay any and all financial claims.
A limited company can issue various classes of shares. This means you can sell stakes in the company or you can transfer ownership of shares.
This can help if you want to grow your business by offering a share of the company in return for someone’s expertise.
If you have more than one shareholder you should get a Shareholders’ Agreement in place. This is invaluable if a shareholder wants to leave the business.
Businesses always need funding, especially if you’re launching a new product or service. Being a limited company can mean it’s easier to access funding.
As the limited company is a distinct entity from its owners some finance providers look more favourably at them than they do sole traders.
Once you’re registered with Companies House your name is protected by law. No one can use the same name as you or anything too similar. As a sole trader, you don’t have that protection and someone could use the same name and do something that damages your business.
If you decide to go limited, don’t forget to get all the advice you need. There is compliance that you must adhere to when becoming limited that isn’t necessary for sole traders.
So make sure you check out the Government’s page about the steps necessary.
If you would like help contact us today for advice.