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The Pros of Setting Up a Limited Company

If you are considering moving from permanent employment to contracting, the first step and decision you will have to make is whether to operate as a sole trader or set up a limited company. Below you will find the top 10 reasons in favour of the latter.

The liability benefit

The key benefit to going the limited company route is that owners and shareholders (as individuals) are not held personally responsible for debts earned if the limited company is declared insolvent – meaning zero or low risk. 

It adds credibility

Clients – and even suppliers – often feel more comfortable dealing with a limited company than a sole trader. A limited company tends to project a more professional image and instil confidence in others.

It can sit on the shelf

There is no set time period within which a limited company must start trading, therefore, the business can be registered long before it becomes operational – meaning the name is protected in the meantime. Knowing there is a company out there boasting your name is also a great motivation to get things moving.

Pay less tax

A huge advantage of being a director of a limited company is that you will most likely pay less tax than if you operate as a sole trader (where your entire income is subject to PAYE and NI contributions. As an example: if you are the director and shareholder of a limited company, you can avoid paying large PAYE or NI contributions by drawing a smaller salary  and taking most of your remuneration  as dividends.  

Flat rate available

As a limited company, you also have the option to register for the flat rate VAT scheme, which allows you to keep some of the VAT you receive from your clients.

Easy succession

If you build up a successful business and want to retire or sell; transfer of ownership is possible, and in most cases, fairly simple.  

Raising capital is easier

There is no doubt that you are more likely to be successful when seeking funding as a limited company than as a sole trader.

It’s inexpensive

Setting up a limited company is fairly inexpensive, depending on whom you choose to register your company with. Depending on the accounting services you take the set-up is often included.

Remain anonymous

Nominee shareholders may be appointed and you need not reveal who is actually running the company.

You can claim expenses

As a limited company you can claim back many business expenses; including accounting fees, travel costs, and equipment. Your executive pension is even a legitimate business expense.

“There are many reasons to choose to set up a Limited Company. But it all depends on your particular circumstances,” advises 1st Contact Accounting..

“Once you’ve done all your research, speak to an expert about your unique needs, plans and aspirations and make sure the first decision you make as a contractor is the right one for you.”

By Troy Stevens

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3 thoughts on “The Pros of Setting Up a Limited Company”

  1. K-ron

    “As a limited company you can claim back many business expense.”

    As someone who is uneducated in these things, who do you claim it back from?

  2. Liam

    @K-ron – good question.

    The short answer is the tax man (HMRC). Its easiest to explain this using an example.

    Consider a Salaried Employee paying for a travel card. They would pay for that travel out of their after tax (net) pay. They therefore pay the full cost of that travel card.

    For a company director the director might pay for the travel card up front but then put in an expense claim to his/her company. So the company actually pays for the travel card. This travel card then becomes a company expense. Since Company Tax is paid as a % (20%) of Profit (i.e. Sales less Expenses) the travel card actually works our to be 20% less expensive.

    I hope that explains it.

  3. dave Thawley

    K-ron – you claim it back off your own company. If you buy a computer (for your company) you pay for it off the top line, if you buy food (within set limits) you can claim that back of the top line, if you drive to the place where you provide your services you can claim that back again off your top line

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