Are there really any benefits to having a limited company instead of working self-employed?

While being self-employed may be all the rage, it isn’t always the best route to go down when starting your own business.

Setting up a limited company, despite being slightly trickier to accomplish, can give you all the perks of being self-employed, but without the risks.

In this post, we are looking at the benefits of a Limited Company compared to self-employment including:

  • Limited Liability
  • Professionalism
  • Tax Implications
  • Name protection
  • Simple sale procedure
  • Easier funding process
  • 5 top tips to help you set up your limited company

1 – Limited Liability

One of the most significant benefits of starting a limited company is limited liability protection.

Instead of being entirely responsible for any losses your business makes – as you would be if you were self-employed – limited liability ensures that this responsibility is removed from you personally. Any debt, legal claims or losses will belong solely to the company while, as a shareholder, will have absolutely no legal obligation to pay more than the nominal value of the shares you hold.

Setting up a business isn’t always successful, and limited liability provides you with added protection, should anything happen to go wrong.

There is one point to mention here however and that is that Directors may have liability in some circumstances even if they use a limited company for their activities.

If they act recklessly, fraudulently or do something that prejudices their creditors’ interests when a company goes into liquidation then they can face personal legal action.

Also signing a personal guarantee attached to a company loan or lease will also transfer responsibility for the debt to the director concerned.

2 – Professionalism

Sometimes the success of a business is all about status. When you’re self-employed, status and reputation have to be built-up from scratch, an endeavour that can often take months, or even years.

However, limited companies are often held in much higher regard and are usually deemed to be more professional, meaning that your credibility is boosted from the get-go.

You may find that some larger companies will only deal with limited companies, especially if you are a contractor, and so in these cases, a limited liability company is a no-brainer.

Consumers are also much more inclined to trust a limited company purely based on their limited status, so going limited could positively impact your business’s growth.

3 – Tax Implications

With a limited company, a sole director has scope for active tax planning.

At the moment, sole traders pay up to 45% in Income Tax on their profits whilst limited companies based in the UK only pay 19% Corporation Tax, allowing for better tax planning and overall savings per year.

By becoming a limited company, you can reinvest surplus income into the business, defer personal income and, if you take a combination of salary and dividends, you’ll also benefit from the £2,000 Dividend Allowance.

To put it simply, going limited could end up saving you thousands of pounds each year.

But there is an important note here:- from the 2023-24 tax year the tax basis is changing and the main corporation tax rate will increase to 25% whilst a new smaller companies rate will remain at 19%.

This is why it is really important to take qualified and experienced advice before you set up a limited company, otherwise, you could see much of your savings wiped out by future tax changes.

4 – Name Protection

While a company name may seem insignificant in the grand scheme of things, it is critical to establishing your business and branding.

If you’re self-employed, there’s no way of preventing your company name from being duplicated (intentionally or unintentionally), which can lead to confusion for consumers.

It is also true to say that a ‘squatter’ could simply register your ‘trading as’ name that you use as a self-employed individual as a new limited company and then sue you to stop you from using your own company name!

However, when you’re a limited company, your company is protected against someone setting up another limited company with exactly the same name.

This means that you gain some protection from squatters who want to cash in on the valuable brand that you have established.

Note however that that this doesn’t provide trademark protection so if you are worried about people stealing your valuable Intellectual Property (IP) then you should also contact a reputable IP lawyer.

5 – Simple Sale Procedure

Your business may not be something that you’d intended to run forever. When the time comes to move on, having a limited company instead of being a sole trader makes the transfer process much more manageable.

As your limited company will exist as a separate legal entity, the company itself will own any assets or property in the company name, meaning everything can be passed on in one, easy transaction.

Rather than having to value and sell each asset as a bundle, with a limited company you simply sell the shares, transferring over any assets and liabilities in one fell swoop.

You can also choose to sell only part of the shares, meaning that you can retain a small stake for the future.

Your limited company will have a track record of accounts lodged with companies house, so the buyer will have a more confident feeling about any records that you use to make the sale.

And as the seller of the business, you have the opportunity to take advantage of entrepreneurs’ relief (now called Business Asset Disposal Relief) allowing you extra tax relief on your sale.

6 – Easier funding process

If you want to bring in equity investors, that is, someone who buys a part of your business, then this can only be done using shares in a limited company.

You’ll also find that funders who provide debt finance, either in the form of loans, leases or factoring will tend to look on limited companies as being more stable.

This means that you have a better chance of getting the funding you need and at a better rate than if you are self-employed.

5 tips to help you set up your limited company

Think that setting up a limited company is the right move for you?

Here are our top 5 tips.

  1. Do a name search – you can’t use the same name as another company and there are restrictions as to what you can use in your name. See the Companies House advice here
  2. Decide what you will transfer into your company – you may want to only sell the IP of your business or you may have assets to transfer in too
  3. Decide on your shareholders and directors – there are some restrictions and you may want to think carefully about who you choose
  4. Decide what funds you are going to transfer in and how – there are different ways to provide cash for your new company and some are better than others
  5. Get advice – don’t go it alone and we can’t stress this one enough! There are all sorts of legal and tax implications and getting it wrong could be disastrous.

Setting up a limited company doesn’t have to be a big issue. With the right support from our qualified, experienced experts at Your Finance Team, it can be an extremely simple matter.

If you’d like to talk over your options when starting a limited company then get in touch with Your Finance Team today and let us talk you through the process.