Starting your own business is an amazing experience, filled with nerves, excitement, innovation, and, let’s be honest, a little bit of chaos! In the UK, many new business owners worry about two primary business structures, sole traders and limited companies. While both options have their plus points, let’s discuss why setting up a limited company might just be the better option and then you can really get your new company thriving!
1. Protect your personal assets with limited liability
Picture this, you’ve started well, it all seems to be flowing nicely with everything going smoothly until, out of the blue, an unexpected expense hits, or a client disputes your services. As a sole trader, you’d be liable for all debts personally. This is where limited liability, the facts of limited companies, comes to the rescue.
In a limited company, your personal assets are generally protected. This means if the business runs into trouble, your personal finances, like your home or personal savings, remain safe. You’re only liable for what you invest into the company. This safety net allows you to take calculated risks to progress your company.
2. Take advantage of tax efficiency
Right, the numbers! Sole traders face income tax rates that can bite into profits, especially as you start to scale. Business earnings above a certain threshold can even push you into a higher tax band. In contrast, limited companies can benefit from lower Corporation Tax rates, which currently sit at 19% for most small companies with profits under 50K and can increase to 25% for larger businesses.
But wait, there’s more! As a company director, you can strategically pay yourself through dividends and a salary, taking advantage of the lower tax rates associated with dividends. This not only means you keep more of your hard-earned money but also allows for greater financial flexibility. Tax planning is key here, and we love helping our clients maximise what they keep in their pocket.
3. Boost your business’s credibility and professional image
First impressions matter, and when it comes to business, being perceived as professional can be a game-changer. Limited companies often come with a certain prestige that can attract clients and investors. The term “limited” implies stability and reliability, making you appear more established than a sole trader.
Introducing yourself as a company director of “Your Business Ltd” instantly adds a layer of professionalism and trust. Companies are also more likely to land contracts, partnerships, and collaborations, and it just feels bigger and better!
4. Attract investment and funding more easily
If you’re aiming for growth, being structured as a limited company makes attracting investment much easier. Investors and lenders often prefer putting money into limited companies rather than sole traders. Why? Because the well-structured nature of a company provides clarity and security.
You’ll find it easier to raise funds, whether through equity financing or loans, since banks usually see limited companies as a less risky investment. With a limited company, you’re more likely to attract venture capitalists and angel investors who can help turn your grand vision into a reality. Just think of it as taking your business to the next level and making a real impact in the business community.
5. More opportunities for employee shares
As your business grows, you might want to bring on talented individuals to help you along the way. Limited companies can offer shares to employees, providing incentives for them to invest in the success of the business. This not only fosters loyalty but also encourages productivity among your team. Employees who own a part of the company are often more engaged and motivated to see it flourish.
In a world where talent is everything, offering shares can set you apart as a competitive employer. Letting your team be part of your growth plan will be an amazing opportunity all round.
6. Succession planning made simple
Planning for the future is smart business. A limited company structure allows for smoother transitions when it comes to succession planning. Whether you want to sell your business in the future, pass it down to a family member, or even bring on a new partner, a company structure can make this a lot easier.
Unlike a sole trader, where the business is directly tied to you as an individual, a limited company provides a separate legal entity. This means the business can continue to operate even if ownership changes hands. It’s so much easier to hand over a company if an exit plan is on the cards!
7. Build stronger relationships with suppliers
As a limited company, you may find it easier to open doors with suppliers. When negotiating contracts or terms, the formal nature of your business can provide the reassurance suppliers often seek before extending credit or offering favourable terms. They know you’re serious about your commitments, and your business will be treated as such.
Establishing strong supplier relationships is crucial for smooth operations, and with a certain level of credibility as a limited company.
Should you form a limited company?
Are you ready to take the leap yet? Why not speak to us and we can guide you on the process, we do the numbers, you grow your business, and we build on it together!
Choosing between being a sole trader and a limited company doesn’t have to be a daunting decision. While both options have their pros and cons, it’s clear that a limited company offers numerous advantages that can help secure your business’s future, increase profitability, and enhance your professional image.
Get in touch to chat about your business goals.
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