Why Should You Set up a Limited Company? And why it is better than Self-employment?
Limited personal liability
One of the most beneficial advantages of forming your own company is the limited liability protection. This means that if your company run into any problem, your own personal assets are secure.
This is because a limited company is a separate legal entity i.e. a legal ‘person’ on its own merits. A limited company is therefore completely separate from the people who own and manage it.
The separation effectively means that if your company has made any losses, legal claims or debts it is the responsibility of the Company and not the director or the shareholders.
However, the separation can be disregarded and the directors and shareholders could be hold accountable and become personally liable in certain cases such as fraud and wrongdoing.
The above makes Limited Companies more advantageous over sole traders as sole traders do not enjoy this protection, put simply, the business and themselves are the same accountable person for legal and financial matters and as such the business’s debts, losses and liabilities are all yours personally.
Professional status and image
Limited Companies enjoys a professional status and create a better image and impression with your customers/clients, suppliers and other third parties.
This is because companies are more regulated and have more complex reporting requirements. Companies also will have their details and accounts published on Companies House and can be inspected by other businesses and individuals.
Therefore it is easier for Limited Companies to attract new investors, creating a trusted brand identity and to access a range of lending facilities.
Limited Companies enable the owners to legitimately pay less tax in contrast to being self-employed and it allows greater tax planning opportunities.
For example in the tax year 2020/21, with the right mix of salary and dividends, the tax savings for a business that makes £50,000 profit could be up to £1,120. This is assuming that you have decided to take out all the available profits, however if part of the profits is not needed then you do not need to pay income tax on that part and it can be reinvested in the company.
This advantage is not available when you trade as Self-employed as all your income is taxed in the tax year it arises. This proves very beneficial, in particular for those with income above £50,000.
Family tax planning
A limited by shares Company, you can issue shares to your spouse or family members. This will allow you to split your business profits and minimise personal tax liabilities.
Companies provide the opportunity to invest before tax trading income in a company pension scheme, in contrast to investing withdrawn income in a personal pension after the deduction of business tax and personal tax.