Hundreds of freelancers, contractors and small businesses decide to form a limited company every day in the UK. There are many reasons a sole trader or small business may choose to incorporate, however the three main advantages of going Limited are -
Limited liability basically means if your company goes bust, your personal property can’t be touched. Your maximum losses can only be up to what you put into the company in the first place – meaning you only stand to lose what you invested. Limited liability can become invalid if you act illegally though – so don’t do anything naughty!
Many clients – especially big corporates – will be more inclined to do business with limited companies. For them it means your payment is purely a business transaction and they avoid the muddy waters of PAYE and national insurance contributions. In fact, many large companies (usually financial institutions) refuse to do business with sole traders.
As a sole trader, you’ll be taxed on your income. This means you’ll end up paying income tax and national insurance contributions on everything you earn. Once you get into the higher echelons of earning you could be seeing a significant chunk of your take-home pay being whisked away by the tax man. By operating through a limited company you will pay corporation tax of 20% (assuming your profits are less than £300,000), and can pay yourself through a combination of low wage (to minimise your PAYE and NIC outgoings) and dividends. This will result in less of your money going to HMRC, meaning more of it in your pocket.
Although forming a limited company can be a sensible and beneficial business move, it does come with certain duties that you, as a director, must perform. Make sure you know what these are before incorporating.
Read more about the Director’s Fiduciary Responsibilities.