What are the advantages of a LimitedLiability Company?
Being self-employed may be the most suitable path for many, but working as a limitedliability companyhas definite advantages.
According to the latest statistics from Companies House, there are more than 4 million incorporated companies in the UK and around 93% of them are active.
There are several main reasons why a limited liability company can be better than beingself-employed.
Security through limited liability
Since time immemorial (1897), the law says that a joint-stock company has its own legal personality, which is separate from the people who created the company itself. This means that third parties such as customers and suppliers enter into contracts with the corporate entity rather than with individual directors and shareholders.
A huge advantage of this legal distinction is that if you manage a limited company as a director, you are limited to limited liability for its debts, which are usually paid up to the nominal amount you paid for your shares or the amount you lent to your company. So if the company runs into trouble or goes completely bankrupt, you won’t be personally responsible for any of its financial losses. One exception to the rule is if the company’s creditors lose money due to fraud committed by a director, in which case you have unlimited personal liability.
In contrast, self-employed status does not protect against financial claims in the event of failure, as the self-employed person and their business are treated as one entity for tax and administration purposes. They have potentially unlimited personal liability for their business debts and in certain circumstances their real estate may be at risk.
Also, very important and common in e-commerce is branding. Very often dealers break the law without realizing it, so the Limited status will protect your personal assets.
Efficiency of taxes and social insurance
Given Benjamin Franklin’s famous quote that there are only two certain things in life, i.e. death and taxes, any opportunity to reduce the tax burden is always welcome.
If you are a director of a limited company and earn a small salary and your income comes from dividends, you will still be entitled to state benefits without paying any employer or employee social insurance contributions (NICs). Dividends are taxed at a lower rate than salary and are not subject to NIC.
Net wages are bigger with a limited liability company. However, the changes to the dividend taxation system mean that shareholders face higher taxes. The latest rates and some examples can be found in our upcoming article ‘How much tax do I pay on dividends?’
Improved reputation and credibility
Trust in business is critical and a limited liability company has an ethos of professionalism that can gain trust in your business.
Some clients – large corporations and especially those in the financial sector – simply choose to work only with limited companies, yet others strongly refuse to deal with unincorporated companies. Thus, having a limited liability company can open up new business opportunities that were not otherwise available before.
Registration of a Limited Company
If you ask most people how they think about forming a limited liability company, chances are they’ll give you the wrong answer. A common misconception is that this is some sort of bureaucratic obstacle course that can take months and cost thousands of pounds. In the United Kingdom, an Ltd. company can be established in a few hours practically without any authorized capital, and yet doing that you may live anywhere in the world.
Easier access to financing
A sole legal entity of a limited liability company can secure financing a little easier than a self-employed. In addition, companies can raise capital by issuing new shares to shareholders and new investors – really anyone but the public(only public companies can do that).
Protect the name of your future business
When you register a company with Companies House (or use the IB Service for that), the company name will be legally protected, meaning that there can only be one company with the same name in the UK.
Being self-employed does not protect your business name. Even worse, unscrupulous entrepreneurs can take advantage of your existing name, which can harm your business and cause the stress and inconvenience of rebranding and potentially losing the hard-earned recognition you’ve spent so long building.
Let’s say you are already fired up – you have an idea and a name for a business, but you don’t yet have the time or capital to develop it. Instead of completely abandoning your idea, you can set up a dormantcompany (which would protect the brand in the meantime).
In the eyes of HMRC and Companies House, a company operating in this state does not trade and does not make significant accounting transactions or financial losses during the financial year. Incorporating a dormant company can protect your future interests and allows you to start operations at any time.
Easier to sell/transfer business ownership
If you want to go out of business, sell your stake. It is much easier to transfer ownership to a limited liability company than to an unincorporated entity. Customers, equipment, and everything else can be bagged and sold.
For the self-employed, this can be problematic, as the equipment used is usually owned by them personally, and many elements of the business are tied to their specific identity.
So, what are you waiting for?
If these advantages have piqued your interest a little and you want to set up a limited liability company as your chosen business structure, we will be happy to walk you through the entire process.
A limited liability company may not be suitable for everyone, but the advantages are obvious. Contact us now. Call us now!
