The Main Advantages of a Limited Company
While being a sole trader may be the obvious popular choice when it comes to business structures, running a limited company also has its perks.
Surveys show that, in the UK alone, about 93% of the 4 million incorporated companies are active. This goes to show that, contrary to popular belief, a lot of people also believe limited companies present good business opportunities.
Here, we will explain why most seem to favor limited companies over sole trading.
Protection Through Limited Liability
Engaging in any type of business will expose you to certain risks. However, unlike when you operate as a sole trader, running a limited company gives you a certain protection should things go tumbling down.
A limited company has always taken an identity of its own, being a completely different legal entity from the people who run it. When a limited company has clients, the clients do business with the company, not its directors nor its shareholders.
Being director of a limited company also has its benefits. One is, by law, you cannot be fully liable if the company suffers financial losses. Directors’ liabilities are usually only limited to how much he owes the company in loans and the value of shares he owns, but he cannot be forced to pay any debt. Unless, of course, when the director is found to be involved in any fraudulent transaction that leads to creditors losing money; then he will be held personally liable.
On the contrary, sole traders do not have this kind of benefit. Sole traders and their businesses are treated as one. This means that the business’ debts are also the sole trader’s debts and they may, or will be, held responsible for paying them. If worse comes to worst, sole traders may even lose their property or personal belongings in the process of paying for the liabilities.
Tax and National Insurance Efficiency
Being tax-efficient is probably every businessman’s goal. Fortunately, limited company directors have an easy way to achieving this, simply because they have the option to get paid dividends. Dividends are not subject to National Insurance Contributions or NICs and are charged less tax. Sole traders are not paid dividends so their whole income always have corresponding applicable taxes and are subject to NICs.
It is believed that running a limited company equates to having higher income. But with the recent modifications in the tax system, limited companies may actually end up with higher taxes as well.
Improved Reputation or Credibility
For some reason, limited companies exude a certain vibe of professionalism that attracts clients. Large companies have more confidence in and are more inclined to working with incorporated businesses than those that are not. This alone is an advantage for limited companies because they can effortlessly draw clients and opportunities in.
Inexpensive and Easy Set Up
Some people have this notion that establishing a limited company is expensive and entails going through a tedious process, when, in fact, incorporating can easily be done online and does not, at all, involve going through complicated loops. Also, forming a limited company does not require millions in capital. In other words, with enough determination, time, and perhaps a few pounds in your pocket, you can set up your own limited company.
Easier Access to Finance
Securing finance is easier for limited companies simply because, by nature, they are a separate legal entity. So is raising capital. This is because limited companies, should the need arise, can simply issue new shares. Shareholders and investors will surely be more than willing to take hold of additional “parts” of the company. For sole traders, raising additional capital may mean tapping their own resources. If they’re short on cash, then it could mean trouble for them.
Easier Process of Securing a Trading Name
Limited companies are required to register with Companies House. Once they do so, their company name will be protected by law and no other company shall be allowed to go by the same name. This means that, in the whole UK, each company’s name is unique. The case is different for sole traders. Almost anyone can decide to use the same trading name and they cannot be legally held liable for it. Also, if someone with the same trading name recklessly tarnishes his business’ reputation, this could affect your business’ image as well. Not only will this force you to deal with the unnecessary stress of negative publicity, but also, you would have to put up with the painful process of changing your trading name if the situation becomes worse.
Protected Trading Name for a Future Business
Another advantage limited companies have over sole trader businesses is that HMRC and Companies House support dormant companies. Dormant companies are businesses that are not involved in any trading activity and do not have financial transactions in a year. If you suddenly decide that you want to set up a limited company, have already thought of a name for it, with a brilliant concept on what products and services to provide, but do not, yet, have the time and capital to start building it, you can establish a dormant company instead. This will allow you to secure a trading name while your business is still on hold. This means that your trading name is protected until you’re ready to launch it.
Easier to Sell or Transfer Business Ownership
The process of selling or transferring ownership of limited companies is less complicated because all equipment can be easily sold, along with existing clients. Because a limited company is an entity of its own, selling it would mean selling all other properties or components that go with it. Unfortunately, it’s not as easy for sole traders. Because a sole trader is seen as being one with its business, some equipment may be personal belongings. This means that selling or transferring ownership of the business would mean letting go of some elements that are closely associated with them or are a part of their identity.
What are you waiting for?
If you’re convinced that a limited company is the business structure that suits you best, then head on to Companies House and have your business registered. The online process can be done with a few simple clicks and you may even get approved for a trading name within just a few hours. Just make sure you have full understanding of what a limited company is and the consequences of operating one.