So you’ve set up in business, you’re making money and everything is good. But have you thought about having your own limited company? There are several advantages of a limited company and in this article we’ll chat about some of the basics.

The early days of your small business

Before we chat about the advantages of a limited company it’s probably best if we quickly explain the difference between being self employed and owning a company. Detailed article here but in a nutshell…

When you first set up in business you’re probably going to be a self employed sole trader. That means you do work, get paid and do an annual tax return (known as Self Assessment) where you tell HMRC how much money you’ve made. You keep records, pay your tax bill and that’s it. It’s by far the simplest way to run a business in the UK. You can do your own accounts and you don’t even need a business bank account.

Advantages of a limited company
Make sure you’ve set some cash aside to pay the tax man!

The important thing to consider is that YOU are the business, the buck stops with you. If things go horribly wrong your house could be on the line (worst case scenario).

So what is a limited company?

A limited company is a separate legal entity. Imagine it like another person. This gives you a layer of protection between your business life and your personal life. Instead of being self employed you become an employee of your own company. You can search for information about any UK company on the Companies House website.

IN A NUTSHELL: A limited company is run by its directors and owned by its shareholders. It’s an entirely separate legal entity. Imagine it like another person.

The biggest disadvantage of a limited company is that the accounting side of things is more complicated and you’ll almost certainly need an accountant. Your accountant will help you:

So if your business is still very young and makes less than £20,000 per year you’ll almost certainly be better off by staying self employed. Having said that I’ve been involved in several businesses that were limited companies from day one.

What are the advantages of a limited company?

There are many advantages of a limited company, not least of which is the tax side of things (we’ll talk about that later). For me though there are three trigger points:

  • Setting up in business with someone else
  • Employing staff
  • Doing any work that’s vaguely risky

There are many other scenarios where setting up as a limited company may be wise, but personally speaking if I’m doing any of the above three things I’ll almost certainly set up a limited company.

Setting up in business with someone else

Even if it’s just a husband & wife partnership I would still consider running things through a limited company. It’s just a neater way of doing things. If you’re in business with non-family members it means you can distribute company shares however you see fit.

Employing staff

Employing staff these days is a minefield. The law is so heavily weighted in favour of the employee less and less small businesses are employing staff directly. I personally wouldn’t employ anyone unless it was through a limited company.

Doing risky work

Most work has an element of risk to it. How likely is it that something could go wrong? What would be your financial liability? Running a business as a limited company gives an extra layer of protection so that if things go horribly wrong you’re not personally liable. This can you your extra confidence to push your business forwards.

The tax advantages of a limited company

A limited company will almost certainly end up being more tax efficient than being self employed. In a nutshell, you’ll pay less tax. This isn’t any sort of dodgy tax scam. We’re not putting assets in tax havens or operating through offshore entities, like the mega-rich do on a daily basis. You’ll pay your fair share and your fair share will probably be less than if you were self employed.

The reasons for this are a bit too complex to cover in this article but very briefly… As an employee of your own limited company you are going to take FULL advantage of every legal tax allowance. That basically means making full use of your:

  • Dividend allowance
  • Personal tax allowance
  • National insurance threshold
  • Employment allowance

Your accountant will be very familiar with all of this and will structure your tax affairs to make optimal use of all of the above, as a bare minimum.

You’re going to pay a whole bunch of taxes including:

  • Corporation tax on company profits
  • PAYE tax on your wages
  • National Insurance on your wages
  • Tax on your dividends

But hopefully all of the above will be less than your Self Assessment tax bill for a similar wage.

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Last Updated on 23 September 2022 by Andy Mac