Is It Time To Make Your Business A Limited Company?

Starting your own business can be an exciting prospect. It’s risk-taking, and it can open up new opportunities and horizons. But creating a company is not easy. It’s a big commitment that requires planning, research, and more than a bit of nerve.

As a common type of organisation, a limited company (LC) restricts the amount of liability incurred by the business’s stockholders.

Limited company status might not seem like a big deal, but there are a lot of benefits to it. For a start, it will make your business legally distinct from those of your family members who live with you. It will also set out clear company regulations that can be followed. Lastly, having a limited company will allow you to raise money from investors or equity from those who own a stake in your company. This is a crucial step in developing any business and is often overlooked.

What’s the Difference Between a Sole Trader and a Limited Company? 

A sole trader isn’t a legal entity, so they can’t enter into contracts or make any formal company arrangements. Sole traders are also liable for debts that the business incurs. This means that if something happens to your business and you go bankrupt, it will affect your personal finances.

In contrast, a limited company has a separate legal identity from the company’s owners, which means that if the company goes bankrupt, then the owners aren’t legally obliged to take responsibility for those debts. This is an important consideration when starting your own business because it means that if things don’t work out in the early stages of your company, then you could end up losing more than just your business.

So which should you choose?

While it might seem like there are more benefits to being a sole trader and getting away from all of the additional legal obligations, this isn’t true. A sole trader does not have access to equity capital or be able to form agreements with other companies on behalf of their small business.

Suppose you’re unsure whether it’s time to do your small business into a limited company. In that case, we recommend consulting with an accountant and lawyer before making any decisions.

Cost

There are some costs associated with setting up a limited company. For example, you will have to pay a registration fee of £12. However, you can choose different options for increased levels of privacy and support. Private limited company formation packages are available when registering as a limited company.

Many people are put off by the cost of registering as a limited company. However, despite the initial outlay, it can be worth the investment down the line to do this as soon as you startup. Setting up a limited company is not difficult and doesn’t require any special qualifications or skills. You should consider all the benefits that come with it before deciding whether or not to do so for your business.

Tax

According to several, having your business registered as a limited company can provide you with the opportunity to pay less personal tax than if you were a sole trader. UK Corporation Tax is levied on the profits of limited liability companies, and the current rate is 19%.

Because limited company profits are not subject to National Insurance Contributions (NICs), you can reduce the amount of NICs you have to pay due to this. You are subject to National Insurance Contributions (NIC) requirements if you are a lone proprietor. Deciding to run your firm as a limited company may allow you to keep more of your profits. More information on this may be found in our tutorial on how to pay yourself tax-efficiently using a limited liability corporation.

Distinct entity

If you choose to start a business as a limited company, it will make your business legally distinct from your family members who live with you. If they have their own registered companies, they can run them without worrying about their business interfering with yours.

It also means you will have your personal credit score and a business one, allowing you to keep things separate and not merge them.

With limited company status, you must follow specific procedures and rules to stay within the law, such as transparency and accountability. Limited company status also sets out clear company regulations that can be followed. This ensures that the people running your company know what is expected of them, and knowing this should make it easier for you to keep your business in check.

Limited Liability

A limited company is a legal entity that exists entirely apart from its owners. Everything, from the firm’s bank account to its ownership of assets to its participation in tenders and contracts, is strictly business for the company and is not related to the interests of the company’s investors.

For tax and administrative purposes, a lone trader and their business are considered as if they were a single legal company.

Funding Advantages

A limited company might not seem like a big deal, but there are many benefits. For a start, having a limited company will set out clear company regulations that can be followed. This will help you stay organised and on top of your business growth as an entrepreneur. You’ll also have the opportunity to raise money from investors or equity from people who own a stake in your company. This is something any business needs to grow and keep up with the demand for its products or services. Lastly, this type of company has the advantage of hiring staff members and taking on bank loans. As well as this, you’ll enjoy personal liability protection. If anything goes wrong with your business, it will impact only your assets rather than those of other people.

Salary Options

If you’re the sole owner of your company, you’ll have the option to take a salary from the company. This is an excellent way to ensure that you get paid while also receiving some benefits. You may also be able to take out loans or get an overdraft on behalf of the company.

But if it’s not just one person running the show, these options will depend on how many shareholders there are. You may be able to draw a salary or an allowance or use your business funds for personal expenses. But if there are multiple shareholders involved in your limited company, they’ll need to approve any payments made by the company.

Shareholders

Shareholders are the people who own a stake in your company. They are entitled to a share of the profits that the company makes. A limited company is set up, so it’s legal for you to sell parts of your company, or its shares, to other people. It means you have many more options when it comes to raising money. You can even sell an equity stake in your business without giving up any control or ownership rights.

Many people use this tactic when running out of capital and need extra help with funding their companies. They’ll sell part of their share to someone else in exchange for cash, which will allow them to keep going and expand their business further. This type of investment is called an equity injection, and it’s often used by companies trying to grow quickly.

If you are looking to set up your business as a limited company, there can be many advantages; however, making sure they are suitable for your business before registration can help you decide.