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
Why sole trader freelancers should incorporate « IT Contractors’ Blog Jun 12, 2009 at 9:08 pm
[...] Many freelancers (and contractors) believe that running a limited company involves a lot of hassle and extra administration. With a good accountant on board, this is simply not the case. You also pay a lot less tax as a limited company director, and a ltd co. could do wonders for your personal brand and image. Read the article here. [...]
Darren Fell Jun 22, 2009 at 8:12 am
So to spell out the financial benefits of going Limited from a soletrader operating business, you can save approximately £3-4k if you are earning anything from £25k upwards.
Yes, the Accounting is naturally more but at between £700-£1,000, that means you are still making a saving of £2-3k.
Going Ltd is what it was, it can be easy alternative that saves you tax and limits your liability.
gerry gregoire Jul 7, 2009 at 9:48 am
Setting up a limited company is the most tax efficient way of working (depending on certain variables). Feel free to contact Danbro for a free consultation on 01253 600140.
Danielle Colyer Aug 27, 2009 at 10:56 am
I wondered if you know whether registering as a limited company means you are registered as a business, or does this have to be done separately? I tried to seek some guidance on this one but all I meet are dead ends! Many thanks Danielle
Michael Rose Aug 28, 2009 at 2:58 pm
Hi Danielle
This info is hard to find because I don't think it's really an issue. I've never needed to register a business.
Whether you have a limited company or are a sole-trader you have 'a business'.
But to be a Limited Company (with all the benefits and responsibilities that that entails) you register with companies house. This includes a registered business address and, I would say, counts as 'registering you business' – nothing separate to do.
You can register your company through a company formations service. We recommend Crunch, if people also need an accountant, or there are plenty of other formation companies out there.
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The benefits of limited company setup rather than sole trader 
Jun 12, 2009
at 12:32 pm
RT @mlane Freelance Coach: Still a sole trader? When is a good time to switch to Limited Company? – http://bit.ly/MpYQ7
This comment was originally posted on Twitter
Jun 12, 2009
at 9:08 pm
[...] Many freelancers (and contractors) believe that running a limited company involves a lot of hassle and extra administration. With a good accountant on board, this is simply not the case. You also pay a lot less tax as a limited company director, and a ltd co. could do wonders for your personal brand and image. Read the article here. [...]
Jun 22, 2009
at 8:12 am
So to spell out the financial benefits of going Limited from a soletrader operating business, you can save approximately £3-4k if you are earning anything from £25k upwards.
Yes, the Accounting is naturally more but at between £700-£1,000, that means you are still making a saving of £2-3k.
Going Ltd is what it was, it can be easy alternative that saves you tax and limits your liability.
Jul 7, 2009
at 9:48 am
Setting up a limited company is the most tax efficient way of working (depending on certain variables). Feel free to contact Danbro for a free consultation on 01253 600140.
Aug 27, 2009
at 10:56 am
I wondered if you know whether registering as a limited company means you are registered as a business, or does this have to be done separately? I tried to seek some guidance on this one but all I meet are dead ends!
Many thanks
Danielle
Aug 28, 2009
at 2:58 pm
Hi Danielle
This info is hard to find because I don't think it's really an issue. I've never needed to register a business.
Whether you have a limited company or are a sole-trader you have 'a business'.
But to be a Limited Company (with all the benefits and responsibilities that that entails) you register with companies house. This includes a registered business address and, I would say, counts as 'registering you business' – nothing separate to do.
You can register your company through a company formations service. We recommend Crunch, if people also need an accountant, or there are plenty of other formation companies out there.
Sep 22, 2009
at 10:24 am
Forum topic: 'Why should i setup a limited company?' – http://www.freelanceadvisor.co.uk/forum/showthr...
Sep 22, 2009
at 10:32 am
http://tinyurl.com/why-go-ltd