Limited Company Formation : 7 Advantages

01.03.21

You will be looking at the best type of company formation for your work, while some use the sole trader option we wanted to discuss in more detail the benefits and why it may be the better option.

1. Protection

As we all know in business you have got to speculate to accumulate or in other words take some risks. The main difference between a sole trader and a limited company is the latter will protect you better from a miscalculated risk, as liability is on the company and not the individual.

A limited company is its own legal entity which separates it from the people who make up the ownership of the company. This means external parties such as clients and suppliers are entering into an agreement with the company rather than individual owners, directors or shareholders.

This means if the company runs into financial difficulties the owners will not be personally liable or responsible for those losses. The only exception is if the company owners/directors lose money through fraudulent activities.

Whereas a sole trader has no protection from financial claims if a business incurs huge losses and goes bankrupt because a self-employed sole trader is a single entity. They have unlimited personal liability for their business debts and in some cases may even be at risk of losing their homes.

 

2. Taxation of a Company

If you’re a director of a limited company and take a small salary most of your income will come to you as dividends but still eligible for State Benefits without paying an employer or employee National Insurance Contributions (NIC).

You may ask why pay in dividends and simply put, you will be subject to less taxation than your salary and not subject to NICs. Whereas the sole trader set up results in your entire income being subject to NICs.

 

3. Reputation of a Company

Larger corporations and financial institutions prefer to work exclusively with limited companies and some will flat out refuse to work with unincorporated businesses. Larger corporations and financial institutions will also have the scope for more lucrative jobs which could lead to longer-term contracts and more earning potential for you and your limited company.

 

4. Low Cost and Easy

If you know little about company formations the idea of setting up is also a step into the unknown. However, it really is quite simple to set up your own company through Companies House in ten minutes and only costs £12.

Find out more here >>> https://www.gov.uk/limited-company-formation/register-your-company 

 

5. Access to Finance

The opportunities to secure finance are far greater as a limited company. As a limited company, you can issue shares to shareholders and new investors in exchange for them investing in the business. Sole traders narrow their opportunities to access finance as raising new capital can only come through personal means, if they have little to no cash it pretty much puts a stop to their plans.

 

6. Identity Protection

Once you register your limited company through Companies House, the company name you use is legally protected. In other words, no other company has the right to use the same name as you in the UK. As a sole trader, you’re powerless in stopping others from using the same company name.

For example, if someone comes along and starts using the same company name and they have a bad reputation or they are scam artists, it could damage your reputation in the process. Then resulting in you having to change your name and lose all the years of hard work building up brand recognition. A stressful experience that could put the future of your company in jeopardy.

 

7. Easier Transfer of Ownership

If you decide you want to sell, transfer your stake or seek new challenges it is much easier to transfer ownership of a limited company than an unincorporated set up such as a sole trader. Things like client lists, equipment and other assets can all be packaged together and sold off or sold in parts.

It gets complicated as a sole trader due to assets being owned by the individual rather than an entity, as the assets tend to have a tie or connection to the specific identity of the company. For example a company website or socials.

 

As you can see from the above the advantages of setting up a limited company are attractive, to say the least, and maybe not as complicated as you initially thought.

 

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