Limited companies are the most commonly formed in the UK and for a number of reasons. The primary reason that people choose this type of business formation is the limited liability that is provided, as well as tax benefits and professional status.
If you are planning to form a new company and you want to know what makes limited company status so appealing, there are a number of advantages that you should make note of.
Limited liability
First and foremost, limited liability is the main reason that many choose to form a limited company. Limited companies ensure that your personal property and assets are safe. This simply means that when you form a limited company, should that company fail and dissolve, you are only liable for the amount of money that you initially invested into the company. Your personal property such as cars and your home, will not be taken in order to satisfy the debt of that company.
Professional status
Another major benefit of forming a limited company is the professional status that you get from having your business incorporated. Many customers and some businesses would much rather deal with a company that is incorporated because they have gone through the process of registering and simply seem to be much more stable than a company that is not incorporated.
Tax advantages
Limited company status also allows you certain tax advantages. Limited companies pay only 19 percent corporation tax on the profits that they earn. Sole traders on the other hand, pay anywhere from 20 percent to 45 percent in income tax on their business profits. You can see the major difference and this offers you a much more flexible situation with regards to tax planning. Plus, you can retain surplus income from your business to pay for growth in the future. Instead of withdrawing all of your profit and paying a higher tax, you can wait and use that money to reinvest into your business when you need additional capital, and save a large amount of tax.
You can also defer profits to a later tax year so that you get a lower rate to pay. You have the option of higher personal remuneration to reduce your income tax and national insurance contributions by simply taking part of your money in income and another part in dividends.
Trust
Not only does having your company incorporated make customers feel that you are more trustworthy, it can also help you when you need to finance that business or raise capital for business growth. Most lenders prefer for companies to be incorporated in order to lend them money. In addition, once you register your new company with Companies House, which is required of limited companies, your business name is protected. No other company, incorporated or not, can legally use your company name once it has been registered.
Conclusion
There are of course, disadvantages to forming a limited company as opposed to a sole trader or partnership business. Before choosing the legal entity for your business, it is a good idea to weigh the pros and cons of all business entities and choose the one that best suits the needs of your individual company.