Why should you consider trading as a limited company?

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Setting up in business as a limited company has various advantages. A number of people set up as a sole trader before converting to a limited company, generally due to the administration required when running the latter. However, the benefits far outweigh the drawbacks, which is why it is a popular choice for many business owners.

What is it?

A limited company is completely separate to the directors and shareholders, so that the fiscal affairs of the organisation are separate to your personal finances. All profit, for which corporation tax must be paid, is owned by the company. Once this has been paid, the profits can be shared. Directors run the company, although they don’t have to be shareholders. Being a director involves legal responsibility.

Most companies are ‘limited by shares’, which means that shareholders can only be liable for the company’s liabilities up to the value of shares they own but aren’t paid for. The directors of a company aren’t liable for its debts, as long as no laws have been broken.

A public limited company floats shares on a stock market, so that members of the public can own a share of the venture. There are rules to be adhered to for each type of limited company.

What are the benefits?

The two main advantages offered by this status are tax efficiency and, as the name suggests, limited liability. As a sole trader, you are responsible for payment of all the business debts, unlike with a limited company. This means that, with the latter, your personal assets remain secure. Once the profits of a business reach a certain level – generally around the threshold for higher rate tax – it can be beneficial to form a limited company.

As a sole trader, you will pay income tax and National Insurance on profits, whereas a limited company is charged corporation tax on profits but no National Insurance. By taking a minimal salary from the company, usually an amount equivalent to the personal allowance, you will minimise payment of income tax and National Insurance. The remainder of your salary can be paid as dividends.

Many business owners find the prospect of running a limited company daunting, but by outsourcing finance and accounting, you will be able to concentrate on generating revenue. To decide whether a limited company is the right choice for you, contact us today.