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Why form a limited company

Form a limited company

Form a limited company

Most entrepreneurs and self employed people are so busy it becomes difficult to stand back and gain perspective on your business. But you might find that if you can spare the time to take the opportunity to stand back and spend some time planning and thinking that the decisions that you make will save you time and money and will lead to a more profitable business.

Thanks to changes in rules in recent years by the Government instead of being self employed you might find it very well worth your while to form a limited company and save yourself paying more tax than you need. Here we weigh up the advantages and disadvantages.

Convert your business to a Limited Company

If you're a sole trader or partnership, there's no better time to convert your business to a limited company. Here are six reasons why:

1. The principal benefit of trading as a limited company has always been the limited liability bestowed upon the company's officers and shareholders. As a sole trader or other non-limited business, personal assets are at risk in the event of failure of the business, but this is not the case for a limited company. As long as ths business is operated legally and within the terms of the Companies Act, directors' or shareholders' personal assets are not at risk in the event of a winding up or receivership. And as often happens on occasion, such events are not always under our own control.

2. The first £10,000 of a limited company's profits are tax free. This is not the case for sole traders and partnerships.

3. Company profits may be distributed as dividends to shareholders. Presently, National Insurance is not applicable to dividend payments, effectively reducing your tax liability still further.

4. Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Quite often, larger organisations in particular will prefer not to deal with non-limited businesses.

5. The costs associated with managing and operating a limited company are not significantly greater than with non-limited businesses. Accountants and other professional advisers may have conflicting views on when they consider the benefits of being limited to outweigh the advantages of being self-employed. In general terms - at least from the perspective of taxation and accountancy - changes to legislation over the last few years have meant much lower costs associated with limited companies.

6. There is no obligation for a limited company to commence trading within any set time period after its incorporation. This means that the formation of a limited company is one simple and low cost method to protect a business name. Whilst this does not in itself give any rights to use of the business name, many clients form companies in anticipation of future development of new businesses or in order to protect the limited company name of an existing non-limited business for the future. No two limited companies can exist with exactly the same name.

See our notes on which is best for a comparative guide to the various types of corporate entities that can be incorporated.

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