Being self-employed is how most individuals run their business in the UK. However, there are benefits to why you should run a limited company compared to running a sole trader route or being self-employed.
It is true that the easiest way to start a business is to set up as a sole trader. You just have to register yourself as self-employed in the HMRC. You can also utilise the annual self-assessment tax process to monitor your business activities.
It takes a more complex formation process to start a business as a limited company. A limited company also has greater responsibilities in the financial and administrative realms. However, there are many advantages of running a limited company compared to being self-employed.
Here are the reasons why you should opt for a limited company:
Less Personal Tax
One of the main benefits of setting up a limited company is that you pay less personal tax compared to that of a sole trader.
Profits generated by a limited company have to pay 20% in Corporation Tax. Parliament plans to decrease Corporation Tax to 17% by 2020.
As the director and shareholder of a limited company, you can decrease the amount of National Insurance Contributions (NICS) because you can opt to get a small salary. You then can have the majority of your income in the form of dividends. Moreover, NICS do not include dividends as these are taxed separately.
If you are self-employed, NIC has control of your entire income. Thus, running a limited company is better as you can have a large chunk of your income.
Owners distinct from the company
A limited company is distinct from its owners. The liabilities incurred during financial hardships are not put on the shoulders of the owners, rather these are held responsible by the company itself. Assets, liabilities, company bank account, and contracts are all under the company.
A sole trader is considered as a single unit for both taxation and administrative functions.
Owners of a limited company are protected during financial hardships of the company. Financial losses incurred will be shouldered by the company, assuming that there is no fraud.
On the other hand, sole traders do not have the privilege of such protection from financial hardships.
Raising of Capital
The current financial climate has made it difficult for many institutions to find funding such as additional capital. However, a limited company is the preferred business structure as the company is separate from its owners.
Ownership of Shares
A limited company can issue different shares. A limited company can also get a shareholders’ agreement if it has more than one shareholder.
Running a limited company truly has benefits compared to opting for a sole trader.
You may contact our firm for more information regarding limited companies.