Tax advantages to setting up a limited company

Setting up a limited company incorporated in the UK is often preferred to operating as a sole trader or partnership.

Here are some of the reasons:

It’s easy
It’s now very easy to start a limited company and takes very little time. In fact, now you can start a limited company in just a few hours. What’s more, the cost of incorporating is an allowable expense against corporation tax.

The company has a separate legal identity
A limited company has its own legal identity so third parties contract with the ‘company’ and not the individual directors and shareholders. This means companies survive the death of the owners and it’s possible for the directors and shareholders involved with the company to change over time. It also means the company’s finances – and therefore its tax responsibilities – are managed separately to those of the director.

The owners' liability is limited
The shareholders of a company have a limited or capped liability for the debts of the business.  A limited company can therefore allow you to take a calculated business risk without the prospect of losing everything. 

It makes you stand out
Sole traders and partnerships will not necessarily have a unique name, but there can only ever be one active UK company with any particular name. Once you’ve registered a company with Companies House, your new company name is protected and no-one can use the same name or even a name that’s too similar.

There can be tax benefits
Sole traders and partners pay income tax while companies pay corporation tax. 
While corporation tax rates are lower than income tax rates the advantage may lie with incorporation.
As well as salary payments to employees, a company can also pay dividends to its shareholders. A shareholder director will therefore often choose to receive the most tax efficient mix of salary and dividends. 

Pension possibilities
A company can make pension contributions and is able to make a higher tax relievable pension contribution than an individual. In addition, contributions will usually be a tax deductible expense for the company. 

Options when raising new capital
Whereas sole traders and partnerships generally have to raise new capital from their own resources, companies are able to raise capital at any time by issuing new shares.
If you would like any advice on Companies House, limited company tax issues, pension possibilities or other tax benefits, give us a call today.