When you establish your own enterprise, you have a few options when it comes to choosing your type of business entity. If you work alone, it is common to trade as a self-employed individual or sole-trader. If you are working with another individual, you may set up a partnership. But what about limited companies (LTD); when should you consider cementing your business as an LTD?

At Mint Formations, we believe you should always consider establishing as a limited company, no matter what it is you do. There are many advantages of limited companies that other types of businesses just cannot offer. In this blog, we explore some of the most important benefits of an LTD.

1. Limited Companies Are Flexible

Limited companies are considered the most flexible of business enterprises, as they can exist in many states:

  • You can have one individual working within the business or many hundreds, even thousands, of employees
  • You can have a single owner or multiple
  • You can go public or stay private

Whatever you want to do with your business, establishing as a limited company often opens the doors you need. This particular business format was designed to be flexible and give companies the range they need to secure whatever avenue of trade they want.

2. Limited Companies Allow You to Contract Workers

Sole-traders and partnerships are not stopped from working with others, but they cannot hire dedicated employees either. Instead, they trade with contractors — essentially, other self-employed workers or businesses that offer services. The downside here is that there is varied legal protection when it comes to the long-term procurement of the services these contractors provide. Being able to hire contracted employees gives you the stability and security often required to grow a business. Limited companies allow you to make those all-important hires.

3. Limited Companies Protect Your Personal Finances

As a self-employed worker, you are the business. This means that the buck stops with you. If you become indebted, for example, you are personally in debt. The result could be your personal finances are affected and you may even lose possessions to cover business costs, such as property, vehicles and other valuables. The limited in limited company, however, refers to limited liability. This is an important protection that keeps your personal life separate from your business life.

When you establish as a limited company, your business becomes its own legal entity. That means if you were to incur business debts, the business would be liable for them. Even if the business goes under, you personally are not responsible for those debts. Essentially, an LTD puts a buffer in place between your personal liability and the liability of your business — a major advantage of limited companies.

4. Limited Companies Have a Tax Advantage

A limited company, being its own separate legal entity, has access to a series of tax benefits that cannot be found anywhere else. From specific business expenses to the ability for partners to secure additional tax allowances by transferring personal income, there are numerous reasons you might want to consider becoming a limited company purely for taxation purposes. The biggest reason, however, is the ability to take dividends from your business.

As a business owner of an LTD, you can earn money in two ways:

  • You can take a salary
  • You can take dividends

A salary is the same as a traditional employee salary. A dividend is a lump sum payment taken out of the company’s profit accounts. Dividends and salaries are taxed differently, with varied rates and impacts on other factors like national insurance. This is beneficial for you and your business because of the way tax brackets change based on what you earn.

How much you earn will impact the tax advantage you see, but the principle is the same for everyone. By splitting up your earnings strategically, through salary and dividends, you can reduce the amount of personal tax you pay by taking advantage of different tax rates and allowances.

To really optimise your income, we recommend you speak to a tax advisor.

5. Limited Companies Can Use PAYE

It may not seem like a major advantage of limited companies, but access to PAYE can actually be a lifesaver, particularly for those not great at managing finances.

PAYE, or Pay as You Earn, is a tax system that has businesses pay their employees’ tax contributions directly to HMRC with every paycheque. It is only available for those registered as limited companies.

PAYE is a very tax-efficient practice, as it means you are always up to date with tax demands, and there is no risk of late payments. This is not the case for self-employed workers, who can only pay tax as part of self-assessment once a year. If you are bad with money, or not good at saving, this can place you in trouble when the new financial year rolls around.

While PAYE doesn’t mean you pay less tax, it does make management easier, which is an often-overlooked advantage you should consider.

6. Limited Companies Offer Brand Protection

When you become a limited company, you register your company name with Companies House. This registered business name is legally yours and no other business can use it. The result is that you have the ultimate brand protection. If somebody tries to trade under your new business name, you can stop them. If you don’t register as a limited company, though, somebody else can use your brand name. They can also register it as a limited company before you and stop you using the branding you’ve established.

7. Limited Companies Build Better Brand Reputation

Reputation in business is everything. The right perception can help improve sales, attract investors and supercharge growth. There are many ways to influence your reputation, and becoming a limited company is one of them.

There is a certain perception of authority and professionalism that comes hand-in-hand with being an established brand over a self-employed worker. Being a limited company puts you in the same bracket as any other company, including the likes of Microsoft, BMW and Netflix. Essentially, it takes you away from being a small-time one-person operation and upgrades your persona with a professional image. If your goal is to be seen as a serious business, there are few better and easier ways to secure this kind of reputation than becoming a limited company.

8. Limited Companies Allow You to Issue Shares and Stock

Stocks and shares can be an incredibly valuable source of capital acquisition when it comes to developing your business and pushing forward with expansion. As an investment tool, you cannot underestimate the power of stocks and shares. Most healthy investment portfolios include stocks and shares, and many investors will be put off if they are unable to put money into your business without the option to receive shares in return. This practice is only available to public limited companies, which means it’s an advantage of limited companies you really cannot afford to ignore.

9. Limited Companies Are a Tradable Product

A limited company is an entity all its own. As a business owner, you have control over the company, but that business is not tied to you. If you choose to, you can leave your business and appoint other people as owners, allowing them to take control in your place. We see this all the time in the media, when major businesses take on other businesses, like when Google acquired YouTube.

The most important thing to remember here is that if you’ve built up a great product, service or customer base, these assets have value and other people will buy them. One of the biggest advantages of limited companies is that it becomes easy for you to sell your small business when you want to move on. Becoming a limited company next to remaining a sole trader can be compared to renting a property versus buying a property.

If you own the property, you can sell it on when you want to leave. If you rent it, you leave and take nothing with you. You can’t sell your self-employed business as you are the business, but you can sell a limited company because it exists outside of your influence.

10. Limited Companies Help You Build a Legacy

Many business owners dream of their legacy. Like the genius who is the late Steve Jobs or the legend who was Henry Ford, they want their world to continue thriving when they aren’t able to carry the mantle anymore.

Since a limited company is not encumbered by your direct involvement, you can use this opportunity to build a legacy that will go on without you at the helm. A self-employed business, quite literally, lives and dies with you. A limited company can stand the test of time.

 

Mint Formations can help you enjoy the advantages of establishing a limited company. Get in touch with our experts to find out how!

 

Want to register your UK limited company today?


Raj co-founded Mint Formations with business partner Andy Tree in 2017. Mint formations is established to nurture small UK businesses and enable exciting new opportunities for quick growth. As a successful entrepreneur, Raj knows how to start and run a business. He currently resides as a board member of seven successful companies across the world. He is best known for founding Integra Global Solutions, specialists in robotics, automation, and business process optimisation.

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