Why you should consider incorporating as a limited company01/11/2022
If you’re ready to start your own business, you should consider starting a limited company. This is the second most popular structure for UK businesses. There were around 4.5 million of them last year, and an additional 500,000 are formed every year.
Limited company equals limited liability
A limited company is a separate legal entity to its owner(s), and therefore, has separate finances. This means that, in comparison to a sole trader, who is responsible and liable for the finances of his or her whole business, a limited company shareholder has “limited” financial exposure. So choosing this business structure protects personal assets and funds in the event that the company gets into financial difficulty
Many people also trade through a limited company as it can be far more tax efficient than operating as a sole trader. A director will often be paid a salary equal to the tax-free personal allowance for the tax year, for example, £12,570 for the 2022/23 tax year, with the balance of their income coming from dividends. Dividends do not attract National Insurance Contributions , and they are taxed at a lower rate than self-employment income.
In addition, company profits are subject to 19% corporate tax. Corporation tax rates are set to rise in April 2023, with firms with taxable income of up to £50,000 paying 19% and those exceeding £250,000 paying 25%. Profits in the interim will also be subject to a marginal rate.
Establishing a limited company allows the firm to be formally registered with Companies House. As a sole trader, your firm is not formally registered, which simplifies the procedure; nevertheless, anybody can use your name for their business, and you will have no grounds to sue unless you have it trademarked.
When you register your company with Companies House, your business name becomes trademarked and no other company may use it. This makes it simpler for customers to discover your business online and on social media, and it helps you appear more stable, trustworthy, and professional. As a result, operating as a limited company can increase your chances of attracting clients and investors.
The disadvantages of forming a limited company
While there are many advantages to forming a limited company, there are also a few disadvantages you should be aware of. For one thing, forming a limited company is more complicated and expensive than operating as a sole trader, which just requires that you register with HMRC.
Another issue is that preparing your accounts can be more complicated as a limited company. A professional accountant is a must, which adds another layer of operating costs to your business. However, if your business is successful and your accountant is competent, you will save far more than you lose from this relationship.
A company must also submit an abbreviated copy of its annual accounts to Companies House. These accounts along with details of the directors and shareholders of the company are available for anyone to view via Companies House website.
Whether or not your business would benefit from a limited liability company structure will depend on a number of factors. However, for many businesses across the country, it is the right choice. If you need advice about forming a limited company or want help incorporating one, JW Hinks’s experienced team of business consultants are here to help. Contact us on 0121 456 0190.