15 advantages of setting up a limited company

Trading through a limited company has many advantages. This article highlights 15 key benefits of setting up a limited company in 2024 compared to becoming a sole trader.

1. Limited liability for directors if things go wrong

Being a director of a limited company means you have the benefit and security of ‘limited liability’.

This means your liability for any financial losses your business suffers is limited. You are not liable to pay any business debts personally.

The only time a limit to your liability would be removed is if you are found guilty of wrongful or fraudulent trading.

A limited company can, therefore, give you added protection should things go wrong.

If things go wrong with a sole tradership (or partnership), the owners are personally liable for all the debt and liabilities of the business.

This is one of the key benefits of incorporating, compared to working as a sole trader

2. Limited companies are tax efficient

One of the most well-known benefits of working through a limited company is that it is typically a more tax-efficient way to trade than going self-employed.

The tax gap between trading structures has narrowed significantly in recent years—mainly due to the increase in dividend tax rates in 2016 and 2022 and the April 2023 Corporation Tax hike.

Key points

• Limited companies pay Corporation Tax on their profits.
• Many company owners pay themselves a small salary and extract further profits as dividends.
• Significantly, National Insurance is not paid on dividends – but it is on salaries.
• As a sole trader, all your profits are subject to income tax and NICs.
• If you own the company with your spouse, you can make the most of each of your tax allowances.
• Working through your limited company allows you to take home a greater proportion of your earnings after tax.

You can learn more in this popular guide to paying yourself tax efficiently through a limited company.

Try our limited company tax calculator to work out how much tax you’ll pay on profits this tax year.

3. The company formation process is simple and quick

Forming a new company has become increasingly efficient in recent years.

If you apply online, you can complete the application process in as little as 20 minutes.

Alternatively, a formation agent or an accountant can take care of the incorporation for you.

Your new company will often be legally formed in under 4 hours during the working week.

4. Company incorporation costs are low

You can form a new company for as little as £50 via Companies House, which is remarkably low despite an official fee increase from £12 in May 2024.

The cost of using a formation agent to deal with the incorporation is usually between £50 and £100.

If you want to use an accountant, the cost is usually low – or free if you sign up as a new client.

5. The company is a distinct legal entity

A limited company is a separate legal entity from that of its owners.

Everything from the company bank account to asset ownership and involvement in tenders and contracts is purely company business and separate from the interests of the company’s shareholders.

A sole trader and his/her business is a single entity from a legal and tax point of view.

6. You can provide a professional image

Working via your own company may give your business a more professional image.

You are also likely to find that larger firms prefer to deal with incorporated businesses rather than sole traders.

If you’re a professional contractor, for example, clients will only work with you if you operate via an intermediary—your own limited company or an umbrella.

7. Your company name is protected

Once you register a company with Companies House, the company name is legally protected.

No other business can use the same name as you or anything deemed too similar.

As a sole trader, someone else could trade under the same name as you, and you couldn’t do anything about it.

This could damage your business and, in some cases, result in you having to go through the costly and time-consuming effort of changing the name of your business.

8. Access to finance is easier

Starting a new business can present challenges when it comes to securing financing and funding.

As a brand new enterprise without an established track record, lenders may view the company as a relatively high-risk investment compared to more mature businesses.

This can make it difficult to obtain loans or credit, especially in the early days.

However, there are some advantages to securing financing as a limited company rather than as a sole trader.

Limited companies have a separate legal existence from their owners and shareholders. This means the company can take on debt obligations rather than the business owner being personally responsible.

It’s worth mentioning again (see ‘limited liability’ above) that despite this separation of legal entities, some lenders may still seek personal guarantees from company directors before advancing a loan to a limited company.

9. Shareholders

A limited company can issue various classes of shares. This means you can easily sell stakes in the company or transfer ownership of shares.

If your limited company has more than one shareholder, you should create a shareholder agreement outlining your duties and responsibilities.

It can also detail what shareholders can and can not do with their shares. This will prove invaluable should a shareholder want to exit the business.

A shareholders’ agreement will also describe how to solve conflicts or issues should things go wrong.

10. Low ongoing costs of running a company

Many people prefer to operate as sole traders rather than limited companies because the start-up and running costs are perceived to be significantly lower.

In the old days, you would have to pay an accountant to compile your accounts manually, but technology has made life much easier for accountants and business people.

Using an online accounting app will cut the time you spend on bookkeeping – your business records will be stored securely, and you can connect your account to your business bank account and even submit VAT and self-assessment returns automatically.

If you’re reasonably competent with a computer, you can also easily handle limited company administration paperwork, such as submitting your Confirmation Statement to Companies House every year without help.

Most accountants will charge more for preparing annual accounts for a limited company than they would for a sole trader. The differential varies, so ask your accountant what options would cost you.

11. Tax relief on pension contributions

If you own a limited company, pension contributions are deductible business expenses for the company, reducing its taxable profits. In other words, you don’t pay Corporation Tax on the amount of money the company pays as pension contributions.

The tax advantage of working through a limited company has been reduced over the past decade. However, tax relief on pension contributions still represents a significant benefit for company owners.

Find out more about paying into a pension via your company here.

12. Tax planning opportunities

As a limited company director, you have access to tax planning benefits unavailable to the self employed.

You can co-own your company with other family members – often a spouse. This means that all shareholders can make use of their tax allowances.

For example, you will pay less personal tax if dividends are distributed between spouses rather than to a single shareholder.

Company directors decide when to distribute profits to shareholders. This gives you the flexibility to time dividend payments across different tax years.

13. Dormant company status is available

If you are not ready to set up a company, you can still form one and keep it dormant.

This means that your business name is protected. If you’re a sole trader, you might want to secure the ‘limited’ version of your trading name without the obligations of running a ‘live’ company.

If you want to shut down your company temporarily, you can revert to dormant status. This allows you to pick up the reins again if you want to re-start trading.

If you own a dormant company, you still need to take care of some (minimal) filing obligations.

14. Tax-efficient life cover for company directors

Company directors can benefit from the tax-efficient treatment of life insurance and income protection policies if taken out in the company’s name.

If you set up a relevant life insurance policy via your company, the premiums are an allowable tax-deductible business expense.

You could save up to 50% compared to paying for life cover personally.

15. Planning for the future

Here are several vital benefits a limited company offers when it comes to succession planning and protecting your assets:

• Transferring ownership of a limited company is a more straightforward legal process than a sole tradership if a shareholder retires, sells some shares, or even dies.
• If you are eligible, you may be able to sell your shares in the future and pay as little as 10% tax on the gain, courtesy of Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief).

You should always seek professional advice before starting a business, as your choice of business structure will depend greatly on your circumstances.

Some useful services

• To set up a company immediately – with prices starting at just £52.99, visit 1st Formations.
• Find a specialist limited company accountant in our directory.
• Try our limited company profits calculator for 2024/5.
• Read about some Companies House changes from March 2024 onwards.