10 Reasons why it's still worth going Limited

Companies May 19, 2016

With the recent increase in dividend taxation, many of our clients are asking whether it still makes sense to incorporate when you are a Sole Trader. It's a tough question to answer as indeed, the tax benefits of running a business as a Limited Company have now been seriously curtailed. If you extract all the profits from your company as they arise, the total tax and national insurance (NI) paid is now almost identical whether you are operating as a Limited Company or a Sole Trader.

There are still several benefits however to operate as a Limited Company. Here they are:

As the name suggests, if you run a Limited Company, you are protected in case things go wrong. Assuming no fraud has taken place, you will not be personally liable for any financial losses made by your Limited Company. Those running a business as self-employed do not enjoy such protection from financial claims if things go wrong with their business. While it's possible (and recommended) to subscribe to a professional liability insurance, there is always a risk of running afoul of the fine print...

2. More professional image or status

In some industries, having a Limited Company can provide a more professional image. If you are doing business with larger companies, you may find that they prefer to deal only with Limited Companies rather than Sole Traders or even partnerships. Indeed, by being transparent, adhering to regulatory requirements and opening company accounts to public scrutiny, you are demonstrating that the business is being correctly managed, and this inspires confidence.

3. Wider availability of some contracts

The reason bigger corporations do not hire Sole Traders is not just image or professionalism but IR35 risk. The IR35 regulation was put in place to prevent employees to set up shop as free-lancers just to save tax. In other words, if HMRC decides that a free-lancer behaves as an employee, then he is required to pay the same amount of tax and NI as an employee would. He does not, whoever hired him is responsible for the back tax and NI, unless he operates as limited company (and in which case that limited company is responsible). It's easy to understand then why some organisations will only deal with limited companies!

4. Name protection

Once you register your company with Companies House, your company name is protected by law. No-one else can use the same name as you, or anything deemed to be too similar. As a Sole Trader, you can use a trading name, but it's not protected and there is nothing to prevent a competitor to start using the same trading name as you. While it's possible to protect a trading name with a trademark, it will be in practice a lot more expensive than just creating a company with that name.

5. Flexibility on income extraction and profit smoothing

While the amount a tax and NI paid if you extract all the profit from your company is similar to what a Sole Trader would pay, nothing prevents you from leaving money in the business. You pay corporation tax as profits arise, but you only pay dividend tax when you take the money out of the business. As a Sole Trader you don't have such an option. If you run a business where profits can be erratic this flexibility means significant tax savings as a result.

Also, if you entertain a lot, a limited company will allow you to pay less tax overall since entertainment is disallowed and therefore the tax impact for a limited company will only be at the corporate tax level (currently 29%) vs. potentially up to 45% if you are a sole trader.

6. Ability to raise capital

A Limited Company can issue various classes of shares. This means you can easily sell stakes in the company, or transfer ownership of shares. If you know you will need to raise capital at some point, being a Sole Trader (or even a Partnership) is just not an option.

7. Ability to add partner as an employee/shareholder

Since you can add shareholders, you can add your partner as a shareholder. If he's not having any other income, this will allow you to double the size of the dividend tax bands. As an example, if your company makes a profit of £100,000, and if you extract it all, your total tax bill will be £32,907 if you are alone but only £20,214 if you share the profits with your partner!

8. Benefit of future corporation tax reductions

While the corporation tax rate is 20% currently, it was announced in the last budget that it would be reduced progressively all the way to 17% by April 2020. While it does not cancel out the increase in dividend tax, it does significantly reduce the blow and restores the competitiveness of the Limited Company.

9. Pension

A Limited Company can fund its employees executive pensions as a legitimate business expense. This offers a tax advantage over those who are running their business as self-employed since it's not possible to obtain relief on the 9% Class 4 National Insurance.

10. Succession

If a shareholder wishes to retire, sell his shareholding, or dies, it is far easier to transfer ownership of a Limited Company than a non-registered business structure. Death of a director or of a shareholder does not impact the operations of the Limited Company unlike what happens in the case of a Sole Trader where the business stops, the accounts are frozen, and continuity is jeopardised by the probate process.

Obviously running as a Limited Company is more complex and requires more admin work than just being a Sole Trader. But some of the benefits mentioned can make a significant difference and this why they are still many cases where incorporating makes a lot of sense.


Franck Sidon

With over 15 years of experience as a Managing Director at TaxAssist Accountants, I have helped thousands of businesses and individuals achieve their financial goals and optimize their tax efficiency.