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.