When starting a business, being a sole trader is often the first port of call when choosing how you represent yourself as a legal entity. However, there are many benefits to operating as a limited company, as in this post, we'll explore those!
Companies House recently reported there are more than 4 million incorporated limited companies in the UK, with a massive 93% of those being classed as "active". With this in mind, why do so many businesses choose to incorporate their business rather than sticking as a sole trader?
1) You're protected through your limited company
Regardless of whether you're a limited company or sole trader, starting a business will always a carry a great deal of risk. Whether that's being responsible for your own earnings, giving up the comfort of paid annual leave or not having your "Boss" to fall back on when things get tough, these risks remain the same. However, choosing a limited company will go some way to shield you from financial risks, should things not go according to plan.
Since 1897 the law has stated that a limited company has its own legal entity, which is separate from the people who are involved in the company itself. That means every client or supplier that enters into an agreement with the legal entity, is entering into an agreement with the business, rather than the individuals running the company. The term Limited Company means that as a Director, you have limited liability, so should the company fall short of it's obligations or agreements made with external suppliers / clients, the Directors and Shareholders are not personally liable. The only exception to this rule is where a company runs into trouble through fraud or other similar situations where the director has knowingly put their obligations to a third part in jeopardy.
To put this into perspective, sole traders have no protection from financial claims should the business fall into hard times, as they are personally liable for any financial claim made by clients/suppliers or in some cases, third parties looking to make a claim for example, negligence. These claims can potentially run into unlimited figures and in come cases, sole traders have even lost their homes in at attempt to repay claims made against their business.
2) More efficient tax and national insurance
As a limited company Director, often the most tax efficient way of paying ones self is to take a small salary, coupled by taking the remaining remunerations as dividends. You'll still be entitled to state benefits, without paying employers or employees National Insurance Contributions (NICs).
3) It's not expensive to form a company, or difficult - but we would advise speaking to us first
Many people will assume that setting up a limited company is complicated and requires a great deal of compliance, but as the old saying goes - When you assume... Your dedicated accountant is on hand to assist you with making the change from sole trader to limited company Director - they can even ensure you're ahead of every obligation from the beginning, helping you to get it right!
4) Easier access to finance
If you're looking to grow your business or have a plan for expansion, having a legal entity by way of a limited company may make it easier to secure finance. Companies can raise capital by issuing new shares to new investors.
5) Selling your business? It's easier through a limited company
When the day finally comes that you're ready to throw in the towel, or alternatively you just want to take a step back from the day to day running of your business, it's much easier to transfer ownership or sell your shares as a limited company.
Not only have you protected your trading name, but you've kept a record of earnings, client and equipment - so the whole lot can be sold off to the highest bigger - or you can sell shares to remain as part of the business. For sole traders, this can be problematic, as traditionally the equipment used is owed by them personally and many parts of the business will be tied to their specific identify making it harder transfer to the new owner.
What to do next?
If you have more questions around setting up a limited company or you think it's the right move for your business, please reach out to us and speak to one of our dedicated accountants. They're on hand to guide you though the process and advise you on the best course of action to take.
