Advantages of setting up a limited company in UK

If you are considering setting up a limited company structure in the UK, there are several factors to take into account.

Many businesses operate as sole traders in the UK (not registered with UK Companies House), but there are many advantages of setting up a limited company in the UK. These advantages include tax advantages, separate legal entity, limited liability, protected business name along with other advantages.

In this blog we will look at the top advantages of setting up a limited company in the UK.

But first, lets start with the basics...

What is a limited company?

A limited company is a type of business structure, which is incorporated with Companies House in the UK and has its own legal personality/identity. This legal distinction means the company is separate from its shareholders and directors. If an individual opts to run the business as a limited company, the business will:

• be legally distinct from the person(s) responsible for running the business;
• maintain separate finances for both business and personal finances.

How to set up a limited company with companies house in the UK

To set up a limited company, an individual needs to register it with Companies House in the UK. The process of registration is called incorporation. An individual can register his / her limited company online or via post. Heres the steps you need to take to set up a limited company in the UK:

Choose which type of limited company to set up

Once you’ve decided to set up a limited company, you have to choose which type you wish to form. The two main choices are:

• Private Limited Companies (Ltd) - which is the most common.
• Public Limited Companies (PLC).

Pick your company name

Like a website address, your company name has to be completely unique. Here at dns accountants, we can assist with the registration and incorporation process on behalf of the business.

Things to complete

• The type of business activities your limited company will carry out by choosing a SIC code (Standard Industrial Classification code) for your business. You can select the most appropriate code from the SIC code list online at Gov.uk on the Companies House website.
• The addresses you want to register for your business. You’ll need a Registered Office Address, and provide a service address. You can use your residential address for both, but you can protect your privacy by using a separate registered office address. Here at dns accountants, we offer a registered office address service.
• Decide on the ownership of your company – how many shareholders and how many shares they will each have.

Documents needed to form a limited company

To complete the incorporation process, you will need the following documents completed and returned to Companies House:

• Application to register a company (form IN01) and the fee.
• Memorandum of association.
• Articles of association (unless you adopt model articles in their entirety).
• Additional information if your application includes a sensitive word or expression.

Top limited company advantages

There can be tax benefits

A limited company route is more tax-efficient from a personal tax point of view than operating as a sole trader. As a limited company director, you will typically take a small salary (with little tax liability) and the remainder of your income in the form of dividends (which are free from National Insurance contributions). Dividend tax rates are significantly lower than standard personal tax rates.

Your company will be required to pay corporation tax on your companys profits. However, corporation tax rates for small companies are generally lower than most income tax rates. Note, corporation tax rates are increasing for some companies in 2023. Read more on how the April 2023 corporation tax rise will affect businesses.

There are also advantages as limited companies can claim more things as a tax deductible expense than sole traders can. Read more in our dns expense guide for limited companies.

2. You get protection through limited liability – H3

One huge benefit of forming your own limited company is your company is a separate entity and therefore provides limited liability protection. If your company runs into financial problems, your personal assets will be secure. This is because a limited company is treated as a separate legal entity in its own right and therefore you dont have personal liability

As a shareholder, you will have no legal obligation to be personally responsible for any debts of the company. If your company becomes insolvent and is unable to pay its creditors, you will only be required to contribute the nominal value of your unpaid shares. Beyond that, your personal assets will be protected.

Sole traders, on the other hand, run a much higher risk as they have potentially unlimited personal liability. This means the individual is personally liable for any and all business debts, losses, and liabilities. This is why forming a limited company is far better to limit liability for individuals and separate out your company financial obligations from your personal finances.

The company is a separate legal entity

A registered limited company will be its own distinct legal entity that is entirely separate from you. This means that everything held in the company name from its own business bank account to loans, credit agreements and assets is completely separate from those of the company shareholders. This separate legal identity of the company protects individuals from legal claims that are brought against the company.

Protecting a trading name for a future business

Limited companies are required to have unique names, therefore incorporated businesses are protected from others using their trading name if they have incorporated at Companies House. Once your name is registered, it becomes protected by UK law and no-one else can use your business name to trade under.

Easier access to finance

If you want to grow your business, fund capital purchases such as buying plant & machinery, you may need to access credit, finance or business loans. Being a limited company will offer you more finance opportunities to raise capital for the business now and in the future. You may get more favourable interest rates and repayment terms as a limited company.

Potential credibility and prestige

There is no doubt that the use of "limited" can add professionalism to a business. It may be seen by your customers as more credible, permanent or reliable and can project a more professional image.

It gives a sense of confidence and incorporating a business as a limited company can open up more business opportunities. It can help greatly to build customer trust and belief in your brand, products or services. There are many large companies that will refuse to do business with you as a sole trader but will be happy to work with you if you run a limited company.

Disadvantages of a limited company

There are some disadvantages of limited companies over being a sole trader in the UK. However, in most cases the advantages of running a limited company far outweigh the disadvantages and in comparison to sole traders.

Some of the disadvantages are as follows:

• Limited companies must be incorporated at Companies House and there is a cost to incorporation.
• Your choice of company name may be restricted if others have claimed the name already.
• You will be required to pay Corporation tax on profits and submit Corporation tax returns.
• You will be required to submit a Confirmation Statement and annual accounts to Companies House each year.
• You cannot set up a limited company if you are an undischarged bankrupt or a disqualified director.
• Personal and corporate information will be disclosed on public record at Companies House.
• Strict rules apply when withdrawing money from the business.
• Limited companies need to adhere to strict record-keeping requirements, including minutes of meetings and recording all decisions taken by directors and shareholders,
• Any changes to your company details, must be notified to Companies House immediately.
• You are likely to need an accountant such as dns accountants when preparing annual accounts for submission at Companies House.

Summary

Setting up a limited company in the UK is not a complex process, however, certain rules must be adhered to. The advantages of operating a limited company instead of being a sole trader are significant. There are other business structures you could consider, such as limited liability partnership, so we recommend you seek professional advice from accountants such as dns accountants for limited company formation, company year-end accounts, self-assessment tax returns and tax planning etc.

For help and advice on setting up a limited company in the UK, contact our team and book a call with us.

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