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The Advantages of a Private Limited Company

If you’re venturing into self-employment, one of the critical decisions you’ll face early on is determining the operational structure of your business.

The majority of self-employed individuals typically opt to operate either through their own private limited company or as a sole trader.

What is a Private Limited Company?

In contrast to a sole trader business, a private limited company is a distinct legal entity from its owners. It’s incorporated, meaning it’s registered with Companies House and has directors and shareholders. The company director bears responsibility for the day-to-day operations and compliance, while the shareholders possess ownership of the business.

Private limited companies have more demanding accounting and reporting obligations. They are required to file yearly accounts, a confirmation statement with Companies House – all of which are public records – along with a Corporation Tax return.

What are the Advantages of a Private Limited Company? There are pros and cons to operating through a private limited company versus personal ownership. Deciding on the optimal business structure can be challenging.

Advantages of operating as a limited company:

  • Limited Liability Offers Financial Protection Limited liability is a crucial advantage of the private limited company structure and a major reason why many individuals opt for this setup.
  • Private limited companies being distinct legal entities shield their owners from personal liability for any business debts in case of financial distress. Their liability is confined to the value of shares they acquired during incorporation.
  • This offers financial security and minimises personal risk as personal assets, such as property, investments, or vehicles, are not jeopardised by creditors.
  • In contrast, as a sole trader, you and your business are legally the same entity, rendering you personally liable for any business debts.
  • Enhanced Tax Efficiency Can Boost Take-Home Pay Tax efficiency is a compelling reason for the popularity of private limited companies. As a director, you can draw a modest salary and supplement your income with dividends.
  • Dividends represent company profits distributed among shareholders after tax, subject to a lower tax rate compared to income tax on salary. With strategic remuneration structuring, tax savings can be achieved, resulting in increased take-home pay.
  • Sole traders lack similar tax advantages and are subject to higher income tax rates, ranging from 20% to 45%, on profits exceeding £12,571.
  • Additionally, you can make tax-deductible pension contributions through your private limited company, thereby planning for the future while benefiting from Corporation Tax relief.
  • Claim Allowable Expenses Operating through a private limited company enables you to claim various allowable expenses incurred exclusively for business purposes.
  • Allowable expenses encompass travel, accommodation, computer equipment, training, insurance, and more. These expenses can be deducted from your company’s income, reducing your Corporation Tax liability, and retaining more earnings within your business.
  • While sole traders can also claim some allowable expenses, the scope for tax savings is broader for private limited companies’ post-incorporation.
  • Protect Your Business Name and Brand Registering your private limited company with Companies House grants protection to your business name and brand.
  • Your chosen business name must comply with government guidelines and be unique. This prevents other incorporated businesses from using the same name. If a competitor selects a similar company name, you can object, compelling them to change it if deemed too similar by Companies House.
  • Having a unique business name safeguards your brand from confusion with competitors, protecting its reputation and credibility.
  • Unlike private limited companies, sole traders lack a business name register, resulting in less brand protection. This makes it easier for limited companies to establish a reputable brand.
  • Enhanced Business Perception Private limited companies enjoy a more favourable image and credibility compared to sole traders. Incorporation signifies stability and professionalism, instilling trust and confidence in your business.
  • Private limited companies undergo stricter regulation and monitoring than sole traders, with additional accounting and reporting obligations. Public availability of their business information fosters accountability, transparency, and professionalism.
  • In certain sectors, clients prefer working exclusively with incorporated businesses. Operating as a sole trader may limit your opportunities for potential work.

Private Limited Company Accounting with Neon

Selecting the right limited company accountant is crucial and can save you time, money, and stress! Our limited company accounting package ensures comprehensive handling of all your business and personal accounting requirements at a fixed monthly fee starting from £160 + VAT. We recognise that every limited company is unique, hence you’ll receive a personalised service.

You’ll also gain access to industry-leading cloud accounting software, Xero in this package. It offers automated features and insightful real-time reporting. Tax returns can be calculated in the background based on your input throughout the year and electronically submitted to HMRC.

Running your own limited company can be demanding. With Neon Accounting, we alleviate the pressure, ensuring your accounting and tax obligations are met while maximising tax efficiency. This frees up significant time for core activities and business growth.

If you’re a sole trader considering incorporation, our Company Formation Service will manage the process from start to finish. For queries about our limited company accounting service, speak to an accountant on 01926 311736 or request a callback. To join Neon Accounting or find out more, complete our online submission form.