It gives your business extra credibility to help win over customers and investors. It provides a clear framework to shape your business exactly how you want it. And it can even give you the opportunity to reduce your tax bill. These are some key benefits of a limited company (and this is just scratching the surface).
Each year in the UK, more than half a million new companies are formed. So why is this? Here’s a closer look at the benefits of being a limited company, and at why so many entrepreneurs choose this structure for their businesses.
What is a limited company?
What do we mean by a limited company? Here are some key limited company features you need to know:
Separate legal entity. A limited company is a distinct legal entity, separate from the people who own it (shareholders), and those who run it (directors). It is taxed, it can own property, borrow money, employ people, sue (and be sued!) in its own name.
Limited liability. The liability of the company’s owners is limited to the amount they have invested in the company (subject to any personal guarantees they may give).
Shareholder ownership. Ownership of a limited company is divided into shares. Depending on the type and volume of shares they own, a company’s shareholders may have a direct say in company decisions.
Company formation. A company is formed by registering it with Companies House. Essential information about each company is kept on the Companies Register, and this information is accessible to the public.
As we’ll see, the advantages of limited company structures are linked directly to these characteristics.
Tax Benefits of a Limited Company
As a sole trader, you pay income tax on business profits, along with national insurance, which is calculated based on a combination of flat-rate and profit-based contributions.
A UK limited company pays corporation tax on its profits, at rates which are generally lower than income tax rates.
The big question that most business owners want to know is, “If I set up a limited company, will I pay less tax?”. And while there’s no universal yes or no answer to this, it’s definitely the case that a limited company gives you a much wider range of options for managing your finances in the most tax-efficient way possible.
There are multiple ways to extract money from your company: by paying yourself a salary, by paying share dividends from profits, and even by borrowing from the company – or a combination of all three. Each of these are subject to slightly different tax rules.
You should carefully consider your wider financial circumstances – i.e. the amount of profit you expect to achieve, your other sources of income (especially relevant if you are running your company as a side hustle), personal allowance utilisation, capital gains, pension arrangements, and other factors.
An accountant can help you assess your situation, and help you come up with a plan for extracting money from your business. The key benefit is that the extraction mechanisms open to company owners are generally a lot wider than for sole traders – and this leeway can often translate directly into a lower tax burden.
Limited Liability Protection
A limited company gives you the opportunity to draw a clear line between you and your business: an option that simply isn’t open to sole traders.
Limited liability is the single biggest advantage that comes with this. As a company owner, you are only liable for the debts and obligations of the company, up to the amount you have invested in it.
This means that subject to any personal guarantees you may give, your non-business personal assets (e.g. your home and savings) are basically ringfenced, and cannot be used to satisfy the company’s debts.
Increased Credibility and Professionalism
The “Limited” or “Ltd” label that comes with forming a company sends out an important message to potential customers.
Transparency is an important aspect of this. It means that members of the public can verify your details with Companies House, and get basic details on who owns and controls the business, and its broad financial standing.
The very fact that you’ve set up a company shows customers and suppliers that you’re serious about structuring and running your business on a stable footing. Over time, they can see that you’re staying on top of your statutory filings and other governance obligations. The result? You’re showing the world that you’re a safe pair of hands.
Access to Funding and Investment
Institutional and private investors can be very choosy about where they place their cash. Even with the best business idea in the world, an opaque setup and a flaky attitude to governance is still a major turn-off.
With a limited company comes a formal structure, and absolute clarity over ownership. There’s also a straightforward procedure in place for the transfer of shares, which makes it easier for an investor to become a stakeholder, complete with limited liability protection.
All of this makes it a lot easier for a business to meet the funding criteria of investors. Indeed, many investors include incorporation as one of their acceptance criteria.
Perpetual Succession
Perpetual succession means that a company exists in its own right, independently of its owners. Shareholders and/or directors may come and go, but your company continues to exist as a distinct legal entity, unless or until it is dissolved.
So why is this one of the benefits of a limited company? As one illustration, imagine you want to sell up and retire. As a start, and in contrast to the sole trader model, there’s a clear distinction between your business and your personal affairs. This clarity makes it as easy as possible for potential buyers to assess the value of the business.
Transfer of ownership is achieved by valuing and selling your shares. And post-transfer – thanks to the principle of perpetual succession – the buyer knows that the company, its legal structure, contracts, and operations all remain intact. In short, when transition happens, perpetual succession helps ensure it’s handled smoothly.
Flexible Management and Ownership Structure
Shares – i.e. those divisible units of ownership that come with incorporation – are among the most attractive benefits of forming a limited company.
Shares come in different categories (e.g. ordinary, preferred, and non-voting), all of which carry different privileges and obligations, making it possible to bring parties on board, while also clarifying what level of input they are going to have in decision-making.
You want to bring an active business partner on board. You’ve sourced an investor to fund your next growth move. In time, you’d like to pass on part of the business to family members. Whatever plans you may have for the business, shares give you the flexibility to shape it as you see fit.
Employee Benefits and Incentives
According to HMRC, 81% of businesses who use them say that employee share schemes have helped them boost their business, and almost three quarters say it has helped them recruit and retain staff.
As your business grows and you compete to bring talent on board, one of the most useful limited company benefits is the ability to use shares to enhance your employee remuneration and incentives offering.
By offering shares to employees – e.g. through purchase options, or in lieu of bonuses – you are literally giving them a stake in the business. And as an added advantage, this type of employee benefit is generally much less of a strain on business cash flow than, say, salary increases.
FAQs
What are the advantages of a limited company?
Compared to the unincorporated sole trader model, the advantages of a limited company include the ability to draw a clear distinction between you and your business. With this comes limited liability protection; i.e. you are not personally liable for your company’s debts. Other benefits of a limited company include enhanced credibility, potentially easier access to investment and funding opportunities, and greater leeway to structure your business in the most tax-efficient ways possible.
Is it worth being a limited company?
With the right support, setting up a limited company is a straightforward, affordable process (with Mint Formations, our formation packages start at just £54.99 inclusive of the Companies House registration fee). And once registered, you can tap into all of the benefits detailed in the article above. On any costs/benefits analysis, setting up a company is most definitely worth it.
How much tax will I pay as a limited company?
Company profits are subject to corporation tax, the rates for which are generally lower than income tax (the tax that applies to sole trader profits).
The biggest tax benefit of a limited company is that it gives you multiple options for extracting money from your business, and greater flexibility in arranging your finances in tax-efficient ways.
What does it mean if you are a limited company?
If your business is set up in this way, it means you have registered your business with Companies House and it exists as a distinct legal entity. Your business name is unique to you: no-one else can register it.
Can one person own a limited company?
Yes. Lots of companies have just a single shareholder. Over time, through the creation and allocation of shares, you can bring on board as many or as few people as you want.
Is Ltd a private company?
Yes. That label, “Ltd” or “Limited” indicates that the business in question is registered as a limited company. It tells the world that your business exists as a distinct entity. People can check your details on Companies House to help verify that yours is a legitimate business.
Why Choose Mint Formations for Your Limited Company Needs?
Trusted by more than 10,000 companies and with 20+ years of experience in UK company formation, Mint Formations can help get your company off to the right start, and make it as easy as possible to tap into all of the benefits of being a limited company. For more information, explore our registration packages.
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