Why You Should Form A Limited Company

Why You Should Form A Limited Company

July 12, 2022

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Let’s face it, being a sole trader has its fair share of drawbacks. When you’re operating as a sole trader, you are personally liable for any debts, business costs, and income tax on your personal income. If things go wrong, you will be held responsible; if things go awry, bankruptcy can have severe implications for your personal assets and credit rating. Fortunately, an alternative offers many benefits: the limited company.

Are you ready to set up your company?

Here are five reasons why you should set up a limited company

Why You Should Form A Limited Company

Protection From Personal Liability

When you’re running a business as a sole trader, you are personally liable for any debt or customers’ claims against your business. This means that creditors can pursue you to repay any debts your business cannot pay, and they can go after your assets to cover the cost. This can be devastating if your business fails and you have no assets to cover the costs: a medical negligence claim could wipe out your entire savings, for example. 

Tax Benefits

When you’re running your business as a sole trader, you will be taxed as an employee on both your profits and any expenses. Once you have registered as a limited company, you can offset your salary and business expenses against your profits. This means you will pay lower income tax rates on your profits than you would have if you were a sole trader.

If the higher costs associated with running a limited company outweigh the benefits of this tax break, you can register as a sole trader again at the end of the year. This can save you time and money on administrative tasks, and you can claim the costs you incurred while running your business as a sole trader.

Separate Legal Entity

All businesses are given a separate legal status. A limited company has more legal power than a sole trader and can issue shares, sign contracts, and own assets in its name. Even if you are the company’s sole director and shareholder, you will not be held responsible for its debts — the company itself will be legally liable. At the same time, you are not personally liable for the company’s debts and obligations — creditors can only go after the company’s assets.

For example, the courts will pursue the company if a client is unhappy with their purchase and sues your company for damages. You are not liable for the debt, and the company’s assets are at risk of being seized in the case of a lawsuit.

Why You Should Form A Limited Company

Increased Credibility

When operating as a sole trader, clients may be less inclined to purchase goods and services or sign long-term contracts. One of the significant benefits of operating as a limited company is that it instils more confidence in clients and partners. You will have a more credible business if you’re running a limited company because clients and investors will see that your business is registered, audited, and covered by insurance. This will help you win new clients, get higher prices for your goods, and secure loans from banks. This will help you avoid issues that sole traders face, like being turned down for loans.

Increased Investment Opportunities

As a sole trader, you can accept investments from friends and family members. However, most banks and investors will want to see a limited company. This is because they will be keener to invest in your business if they see a limited company on your balance sheet. This will make it easier to secure long-term loans, as banks and other investors will be more inclined to lend to a business with a lower risk of default. This will help you fund the growth of your business and reduce reliance on your savings.

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