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.