5 Financial Advantages of Limited Companies

 

There are several reasons why a start-up might choose to operate as a limited company. Here we outline five financial advantages of limited companies to help you to decide what kind of business registration is best for you.

VAT registration and other administrative requirements can make starting a new business a stressful process — especially if you lack knowledge. So, if you are considering registering as a limited company, it’s essential to understand exactly what a limited company is — and how incorporating your business can lead to success.

What Is a Limited Company?

A limited company is a business that is incorporated or formally set up and registered with Companies House — the registrar of limited companies in the UK. A limited company issues shares to its shareholders, which is why the definition of a limited company by GOV.UK is a company “limited by shares” or “limited by guarantee”.

  • Limited by shares: These businesses usually make a profit, meaning the company:
    Has shares and shareholders
    Is legally distinct from those who run it
    Has separate finances from directors
    Can retain the profits it makes after paying tax

 

  • Limited by guarantee: These businesses are usually “not for profit”, meaning the company:
    Has guarantors and a “guaranteed amount”
    Is legally distinct from those who run it
    Has separate finances to your personal ones
    Has profits invested back into it

Limited companies are managed by directors — also known as “company officers” — who could also be the company’s nominal shareholders. A limited company should have at least one director — maybe more.

Now you know what a limited company is, here are five of the financial advantages of incorporating your business.:

1) You Could Pay Less Tax

One of the main advantages of a limited company — in comparison to a sole trader — is you could end up paying less tax.

If you’re the director and shareholder of a limited company, you could choose to take a modest salary and gain most of your income through dividends. This way, you can minimise the amount of National Insurance Contributions (NICs) you pay, as limited company dividends are taxed separately and not subject to NICs.

2) You Have Limited Liability Reassurance

“Limited liability” means you will not be personally liable for any financial losses incurred by your company. So — unlike those running a self-employed business — you get added protection with a limited company should things not go well, because you and the company are two separate entities.

3) Your Company Name is Safeguarded

Once you’ve registered your company with Companies House, its name is protected by law. This means no-one else can use that name or any name considered too similar.
If you are a sole trader, however, someone else could trade under the same name as your company — and there’s little you can do about it. Having to go through a company name-changing means establishing your reputation under a new banner — giving competitors the advantage and incurring unnecessary costs.

4) You Can Class Your Employees’ Pensions as a Business Expense

Unlike those running a self-employed business, a limited company can fund its employees’ executive pensions as a legitimate business expense.
How does this work? Let’s take the 2018/19 and the 2019/20 tax years as an example. The Corporation Tax rate is currently 19%, so, for every £100 profit your company earns, you’ll pay Corporation Tax of £19. So, out of every £100, the company keeps £81 to potentially pay out as dividends. But, if you pay that £100 into an employee’s pension fund, it only effectively costs the company £81 — because of the reduction in Corporation Tax payable. Over time, that £100 investment will also grow within the pension fund.

5) You Can Raise Finances for Your Company

Since a limited company is a separate entity from its owners, it’s slightly easier for it to secure business finance than it is for a sole trader. For instance, you can raise extra capital by selling shares. Shares also offer advantages to investors, in that they protect them from company failures, as their risk is limited to the value of their shareholding.

Finance and costs are an integral aspect of a business’ operation. So registering as a limited company could be the most cost-effective and profitable step you could take for your business. However, the advantages of limited companies stretch far beyond financial matters. One of the main benefits of owning a limited company is you have more professional credibility than a sole-trader! And a company’s credibility is important to get new customers — and maintain your old ones!

 

When you start a business, one of the most important decisions you’ll make is whether you’ll be a limited company or a sole-trader. Mint Formations can help you register your company and make your business idea a reality!

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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