What’s a limited company?
A limited company is a distinct legal entity from the business owner that can be formed whether you’re a one-person business or have employees. By forming a limited company, you serve your business as its director.
As director, you’re responsible for the legal and financial decisions your business makes, but your business’s assets and liabilities are totally separate from your own individual finances. This means that all profits and losses belong strictly to the company, meaning you must always act on behalf of the company.
Limited company advantages
- Unlike a sole trader a limited company has the benefit of limited liability, as incorporation forms a legal distinction between the business owner and their business. This means that personal assets aren’t exposed – you only stand to lose what you put into the company.
- Broadly speaking, limited companies stand to be more tax efficient than sole traders, as rather than paying Income Tax they pay Corporation Tax on their profits. As things stand this offers a kinder tax rate, meaning forming a limited company can be more profitable. In addition to this, there’s a wider range of allowances and tax-deductible costs that a limited company can claim against its profits.
- Once you’ve registered a company name nobody else can use it, in contrast to sole traders who aren’t offered the same protection.
- Limited liability, One of the biggest benefits of having a limited company structure instead of operating as a sole trader is that with a limited company you have limited liability. If you want to operate as a sole trader, you will be completely responsible for your business and its finances. As a sole trader, the business owner and the business are treated as one entity. Whereas, with a limited company the business itself is a separate entity in the eyes of the law. If you have business debts as a sole trader or your business goes bust your personal finances and assets are in danger. This is because legally there is no difference between your assets and the business’ assets. Therefore, it’s better to create limited liability as your personal finances and assets are protected should there be problems with the business finances.