If you are self-employed, there are two main ways to handle your income and taxes: being a sole trader and setting up a limited company. There is a vast amount of information about the pros and cons of setting up as a limited company and equally as much bad advice on the benefits of doing so. This RJF Accounting blog hopes to enlighten you on the core benefits of setting up a limited company and how to go about it.
What Are the Benefits of Setting up a Limited Company?
The core benefits of being a limited company are limited liability, tax efficiency and professional appearance. But what does all that mean? What other benefits are there?
Minimising Personal Liability
Limited companies are treated as their own legal entity; this means your personal assets are safe should the business ever fall into difficulties. This is known as the ‘corporate veil’. Any debt, losses, or legal claims associated with the company are the company’s responsibility – not its owners or directors, other than the value of any nominal shares you own.
Protecting Your Brand Name
All registered company names have to be unique, which adds the benefit of if you were to register your company brand name as “Joe Blogs Limited”, no one else can name their company the same.
Running your business as a limited company has tax benefits over being a sole trader. If you are a sole trader, your income is subject to 20-45% tax, whereas corporation tax currently is 19%. These savings can be reinvested into the business or used to increase your take-home pay.
If you run your business with a business partner, it is much easier to split your profits as a limited company for tax purposes. You can also issue shares to family members and divide your business profits further, which helps reduce your tax liabilities.
Limited company directors can take their earnings in two ways which help to reduce tax liabilities. They can take a standard salary and dividends from the business’s profits. As dividends are taxed slightly different from personal wages, this can help reduce your tax bill.
Running your business as a limited company offers an air of respectability and professionalism, more so when dealing with larger companies. You are no longer “Bob from down the street” – you are Bob, the director of a limited company. Some larger companies will only deal with limited companies due to tax and insurance reasons.
Disadvantages of a Limited Company
Whilst there are many benefits to being a limited company, there are, of course, downsides. There is a lot more paperwork to navigate as a limited company than as a sole trader and other things that need to be done, including:
- Filling annual accounts with Companies House and HMRC
- Company formation fee with Companies House
- Increased accounting practices to consider
- Strict procedures must be followed when withdrawing money from the business
- Additional tax returns and paperwork to be filled with HMRC
Those are just a few additional aspects that need to be considered and additional costs involved in running a limited company, which is why it is not for everyone and always advisable to speak to a professional accountant before taking any steps to making the move.
Are You Looking for Advice on Going Limited?
It is always worth chatting with an accountant if you have doubts or questions about moving to a limited company. Here at RJF Accounting, we have been helping startups, sole traders, and company directors navigate the ups and downs of running their business, and we know how to ensure that you are on the right path. If you would like a chat about moving to a limited company, give us a call today!
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