Unless you are a micro business, there are a number of compelling reasons why you should trade as a limited company rather than a sole trader, or even worse, a partnership. With a partnership, not only are you liable for your own debts but those of your business partner or partners as well.
- Limited liability. The overriding advantage of a limited company is that the company is a separate and distinct legal entity in its own right. You may own the company as a shareholder but you do not own the assets in the company and neither are you personally responsible for its liabilities. This means that if trading takes a nosedive or things go wrong unless you have personally guaranteed any company liabilities you can walk away and not lose your house or your personal assets.
- Tax. Current tax rules mean that for many, trading as a limited company will save a substantial amount of National Insurance, the rates of which have increased substantially for the self-employed in recent years. If, for example, your profits are say £45,000 you are looking at an increase in take-home of at least £2,000 which for some could make all the difference – perhaps an overdue family holiday.
- Status. Trading as a limited company gives a more substantial image than trading as a sole trader. In truth of course, it doesn’t mean a lot because setting up a limited company is so cheap, but nevertheless, many have succeeded in setting up in business or getting their first break with a big customer purely because they set up a limited company.
- Trading Name. Using a limited company gives you a measure of protection for your trading name. I say a measure of protection because such protection is limited e.g. others can set up a limited company with a similar name and for better protection you need a trademark or like one of my previous clients you need to reserve as many possible variations of your name at Companies House. Certainly, it’s better than having no other strategies in place to protect your trading name which could well become valuable intellectual property.
- Ease of Transfer of Ownership/Succession. Because a limited company is a distinct and separate legal entity in its own right and owns its property directly it can be convenient for the transfer of ownership of assets avoiding expensive legal conveyancing and the more expensive rates of stamp duty for property. Similarly, if you wish to pass on your business to your family it is much easier to do so with a limited company.
- Necessity for Many Freelancers/Contractors. For many self-employed individuals trading as a limited company is a necessity because many companies and/or pseudo-employers will not take you on unless you are utilising a limited company, because of tax and the employment protection rights given to employees.
At 1 to 1 Accountancy we are experts in company formation and in advising clients on the best business structure for their individual circumstances, so speak to us about how we can help you.