The benefits of limited company setup rather than sole trader

Freelancing and contracting is becoming a normal work practice within our society but it astounds me as to how many people continue to work as a sole trader rather than through a limited company.  When I say limited company I am not talking about an umbrella company that is offered by recruitment agents but a standalone limited company where the only shareholder is the individual.

The main argument against limited company formation, from the perspective of the individual, is the perceived excessive costs and administrative tasks.  These range from setup costs to ongoing accounting fees, both administrative and annual reporting related, plus the thought that record keeping for a limited company is extremely detailed and time consuming.  However there are online accounting and tax systems available that take the cost and effort out of operating a limited company – both from the setup and day to day operating perspective.  The fact is there are many advantages to running a limited company ranging from; limited liability, reduced taxation and corporate branding.

Limited liability

This is extremely important in today’s society and one that every freelancer must be aware of.  For me this is as important as health and life insurance simply because if a client decides to take legal action against you for any reason, then the liability lies with the company and not you as an individual.  This generally means your personal assets, and those of your family, are protected.  Through a limited company structure only the assets of the company are at risk whilst if you operate as a sole trader then your personal assets are at risk.

Reduced taxation

Like many western countries tax in the UK is a major burden on individuals and small organizations.  In the UK there is the requirement to pay NIC on your earned income as an individual and as an employer and this can increase considerably your overall tax burden.  Through operating within a limited company structure, you can pay yourself a minimum salary and maximize dividends out of any company profits.  If you are a lower rate taxpayer then the 10% tax credit wipes out any dividend liabilities you might have owed.  If you are a higher rate taxpayer your liability is reduced by 10% so you are still benefiting when compared to your net income as an individual because the NIC payments are vastly reduced if not zero.

Company management and branding

If your intention is to operate and grow your business for the future then limited company is the approach to take.  The formation of a limited company indicates that the business is serious and has a long-term objective.  From a branding perspective, a limited company has more credibility than an individual and the name of the company can still be your own name.  In addition a limited company provides a more effective structure from which to employee additional people if that is your future intent.  The quicker you build up the credit rating of your company the faster you will be able to grow it separate of any obligation on you as an individual.

By Daryl Close, business success consultant and coach

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Are you still a sole trader? Is it time for you to switch? Still have questions? Leave a comment below and join the debate