What are the advantages of trading as a limited company?
Other than it being the most tax efficient way, with more tax planning opportunities than being self employed, perhaps the most attractive benefit of trading as a limited company is the aspect of limited liability…
- Being Limited means essentially this protects the personal assets of the officers should the company run into financial difficulty.
- Many of the costs and administrative requirements associated with running a limited company are now not much more than those of a sole trader or partnership (it didn’t used to be this way but the Government has made huge strides in helping small limited business develop).
- Limited companies also instill added confidence in suppliers and creditors; many large organisations will only conduct business with limited companies.
- The ownership of a limited company can be easily divided up through the sale of shares.
- The shares can be further used as a means of generating capital i.e. selling shares in your company.
The tax implications of trading through a limited company as opposed to as a sole trader or partnership are quite complicated but we do have a great page for sole trader or limited companies that we would recommended you read. Having a limited company for some is viewed as an “insurance policy”, especially for a new or high risk business, ensuring that you do not risk your personal assets on a speculative venture.
In addition to limited liability, a limited company has the following advantages:
- You can give a share of the business to others, e.g. family, but if they receive dividends you’ll need to be able to justify the work they do if investigated by HMRC as every time you make a dividend payment (you can make these whenever you wish) they will also receive a percentage. For example husband and wife: if the wife has 80% and the husband has 20% and they draw a dividend of £1,000 the wife will receive £800 and the husband £200.
- It may be easier to attract people to invest money in your business.
- Obtaining bank loans may be easier.
- In the event of a partner leaving, it is easier to continue the business.
- Limited companies offer better tax planning opportunities – for example every penny you earn in a tax year as a sole trader will be taxed that year, however with a limited company you can store money in your company and take in future years.
- It is easier to sell the business.
- You have a better standing in the public eye.
- It can assist in the protection of a name.
- People have more confidence in your business as they can check up on your company, on the public records, on Companies House.
- Contractors and Freelancer’s may find it easier to obtain work.
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