Working for yourself can give you a greater sense of freedom, more flexibility and often the chance to earn a higher income. However, when starting a business, you should give careful thought to how to structure your enterprise as there can be some important benefits you can take advantage of, depending on how you set things up.
There are many advantages to setting up a limited company for your new business over operating as a sole trader or partnership. However if you are thinking about working for yourself it is important to consider the pros and cons of operating as a sole trader or as a limited company to find the best solution that fits you and your business needs.
What is a limited company?
A limited company or an LLC (Limited Liability Company) is a company that has been registered with Companies House and is a completely separate entity to its owner(s). The owners are protected by ‘limited liability’ which means that, so long as no personal guarantees have been given and no fraud has taken place, any assets such as personal bank accounts, houses, and cars will not be accessible to company receivers should the company fail, and debts need to be paid.
The advantages of a limited company
Tax
One of the main advantages of setting up a limited company is that you will generally pay less in personal tax and so therefore it can be more profitable. As a company director, you will be able to pay yourself a salary by taking a small sum from the business and a larger some from the company dividends which are not subject to National Insurance Contributions (NICs).
As a sole trader, your entire income would be subject to NICs, which would result in you taking home less of your earnings. As a self-employed person, you will need to submit your tax return every year.
This is often the main reason people decide to form a company and it is therefore important to get tax advice on the advantages of the proposed structure for your particular business.
Limited Liability
Another advantage is the protection ‘limited liability’ brings, as mentioned above. If you are a sole trader, then you and your business are considered a single entity, and so any personal assets, such as your house and money, can be used to pay off debts should the company go into liquidation.
Business image prestige and protection
When you register your business with Companies House, you will register your business trading name. Once registered, this name is then protected by law, meaning no one else can legally use that name to trade under. The same goes for names that are too similar to yours. Your brand name is just as important as your brand image and some big businesses will only ever work with limited companies. So, becoming a limited company may open up more business opportunities than operating as a sole trader.
Shares
Owners of limited companies are able to issue and sell shares how they choose in order to grow their business. This can have the added bonus that shares can be transferred to a successor meaning that the company can continue to trade should a shareholder decide to retire or if they pass away. Being self-employed does not offer this protection and therefore if you die your business may cease to exist as a result.
Business funding and expenses
As a sole trader, you may find it more difficult to secure business funding or investment and you may have to inject much of your own money into the business to get it off the ground. There are costs involved in setting up a limited company, but you can register your business for as little as £12. As the owner and director of a limited company, you have the option to take out a director’s loan from the business up to the value of £10,000 interest-free, to be paid back within nine months of your company’s year-end.
As a sole trader many of your expenses may have to come out of your own pocket, for example if you need to buy a printer or you need to travel across the country for a meeting. However, as a limited company, expenses such as these that are made in the pursuit of business can be claimed as a business expense. A good example is if you have employees, you can fund their pensions as a business expense.
Get advice on setting up your own business
At Bird & Co we know how stressful it can be to set up and run your own business. Our friendly team of solicitors can advise you on all matters great and small about setting up your business. We aim to offer a quality service which is affordable for all businesses, large and small.
Contact us today on 01476 372 042 or make an enquiry at the top of this page.