Company Incorporation!

A simple private limited company definition is ‘a company that is a legal entity in its own right, separate from the identity of its owners, and has special status in law’. The assets, liabilities and profits belong to the company, not the owners. 

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A private limited company is incorporated. It is registered with Companies House and issues shares to its shareholders. It can also be known as ‘a private company limited by shares’. 

 

Private limited companies offer a number of important advantages compared to businesses operating as sole traders:

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Reduced risk of personal liability 

As a sole trader, you are personally liable for all the debts and liabilities of your business. In a private limited company, you and any other shareholders are only liable for debts up to the value of your shares. That reduces the risk of having your personal assets seized to pay for the debts of the business if it fails.  

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Higher business profile 

A private limited company is perceived as more substantial than businesses run by a sole trader. When customers place orders or award contracts, they want to be confident that the supplier has the resources to provide a reliable service. The perception is also shared by investors, so it may be easier to attract funding as a limited company.

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Lower taxation 

Sole traders pay income tax and National Insurance contributions on the profits of the business through an annual self-assessment tax return. The rate of income tax and National Insurance contributions is equivalent to that of a private individual and includes the same personal allowances. 

 

A limited company pays Corporation Tax, which is based on income minus allowable business expenditure. 

 

However, Corporation Tax rates for smaller businesses are lower than the equivalent income tax rates and companies can claim a wider range of allowable expenditure. 

 

Although you will also pay personal income tax and National Insurance contributions as a director or owner of a limited company, you have greater flexibility in the way you pay yourself, which can lead to savings on your personal tax bill.

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Easier access to growth funds

As we mentioned earlier, private limited companies have access to a wider range of funds for growth, including bank loans, venture capital and crowdfunding because investors see limited companies as a lower risk. You can also raise capital by selling shares in your business, although you cannot offer them for public sale. 

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Protected business name 

When you register your business name with Companies House, the name is protected and cannot be used by any other business. Anyone wishing to register a name must check that it is available. If Companies House recognise a matching name or a name that is very similar, they will advise the business and refuse to grant permission. This level of protection makes it difficult for other companies offering copies of your products cannot ‘pass-off’ their products as genuine. 

 

Personal income flexibility
If you are an owner or director of a limited private company, you can pay yourself a combination of salary and dividends. As dividends are taxed at a lower rate, this will reduce your tax bill and provide a more tax efficient method of remuneration compared with salary alone. 

There are also other ways to take money out of the business as a director, including bonus payments, pension contributions, directors’ loans and private investments. These offer various degrees of tax efficiency. 

Sole traders do not have the same flexibility. They take income from the profits of the business and the income is taxed at standard personal income rates. 

 

Company pension provision 
In a limited company, you may be able to take advantage of a company pension scheme as well as investing funds in a private personal pension scheme. Sole traders have to make their own provision by joining a personal pension scheme and making regular payments.

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