WHAT ARE THE BENEFITS OF FORMING A LIMITED COMPANY?
BENEFITS OF FORMING A LIMITED COMPANY
Did you know that registering a limited company is the 2nd most popular way of running a business in the United Kingdom?
By the close of 2020, there were close to two million registered limited companies in the country. It’s a fact that goes to show that there are tons of benefits to enjoy.
Benefits of Registering a Limited Company
- Protection through Limited Liability
Doing business requires the company owners and managers to take calculated risks every once in a while. It’s something those running limited companies and those operating as sole traders have to do.
While this is considered part of running a business, only the former is insulated from risks that may go wrong. In the case of sole traders, they have no option but to bear the brunt of the risks they took.
A limited company, according to the law, is a separate legal entity from its founders. As such, clients and suppliers enter into contracts with the entity itself, not its shareholders or directors.
What does this mean? As a director of a limited company, you have capped liability for any debts incurred by the company. Archimedia accounts have established appropriate methods. In short, if the company ceases operations, you can’t be held responsible for the losses it has incurred.
- Professional Status
Your professional image and status will be drastically improved the moment you begin operating as a limited company. Although its internal management, ownership structure, and activities will remain the same, the public tends to hold limited companies with higher regard.
In addition to creating a better impression, the public is more confident dealing with an incorporated business as such businesses are rigorously monitored. Once incorporated, they are required to abide by specific reporting and accounting requirements.
Their accounts and corporate details have to be published as part of public records, making it easier for the general public to inspect its dealings. Having a corporate image can also benefit the company in the following ways:
• It makes it easier to compete in an even field with businesses in the same niche
• It becomes easier to attract new investors and clients
• The company gets to create a trusted and valued brand identity
• The business gets access to more lending opportunities
• It becomes easier to expand into different markets and locations
- Company Pension
If you are the owner of a business registered as a limited company, you have an option to invest a pre-tax sum in the company’s pension scheme. In the long run, the director gets to save money instead of taking it out and investing it in another scheme.
For example, taking money from the company and investing it in a personal pension scheme will attract two types of taxes: a personal tax and a business tax.
- Funding
Regardless of their niche, new businesses find it challenging to obtain financing from banks and other financial institutions.
In a limited company, the lenders are required by law to treat the company and its owners as separate entities.
Therefore, it becomes easier for the company to get access to business financing, something that sole traders may not be able to do.
- The Process is Quick and Straight Forward
Gone are the days when an entrepreneur had to wait for days or even weeks for Companies House to review the submitted paperwork. Today, it’s possible for one to set up the limited company in a matter of minutes.
Moreover, the fees charged when incorporating this type of company can be deducted from its annual tax as part of the corporate tax as it’s a permissible expenditure.
- Securing a Trading Name
Immediately the company gets registered with Companies House; its trading name becomes legally protected. This means that only that company can use the said trading name in the United Kingdom.
In the case of a sole trader, another entrepreneur can opt to use the same name or something close to it, and there isn’t much that they can do about it. If the said trader is engaged in shady dealings, this could end up hurting your brand.
- Tax Planning and Efficiency
Limited companies operating in the UK are required to part with 19% of their profits as corporation tax. On the other hand, sole traders have to pay as low as 20% and as high as 45% in income tax.
Incorporating a company provides its owners with better flexibility for tax planning purposes.
a) Reinvesting the Surplus Cash
Instead of withdrawing all your yearly profits from the company accounts, you could opt to retain a portion of the surplus income for use in the future.
The surplus income can be used to fund expansions or even purchase new and better machinery.
Regardless of how you look at it, such a move makes more sense than withdrawing all profits and paying higher income tax rates.
Reinvesting the surplus cash also ensures that you won’t have to start scrambling when the company required additional capital to finance its operations.
b) Deferring Personal Income
Did you know that a limited company owner could defer withdrawing their profits until a later tax date when the rates are expected to be lower?
It’s an effective strategy to use, especially when you suspect that the profits currently available may take you into a larger Dividend Tax bracket or higher income tax band.
- Shareholders
Upon registering a limited company, its owners can opt to issue varying classes of shares. It offers you an opportunity to either transfer ownership of your shares or sell a stake in the company.
For limited companies with multiple shareholders, they are advised to ensure they get a shareholders’ agreement. Such a contract will outline the various duties and responsibilities allocated to each shareholder.
When drafting the agreement, a clause can be included to detail what the shareholders can or cannot do with the shares in their possession. The agreement will come in handy when one or several of the shareholders decide to sell their shares and exit the company.