Benefits of setting up a limited company in the UK

The UK is one of the easiest and most cost-effective countries to set up a limited company. This business structure also offers significant advantages over others, such as sole traders, including limited liability and tax efficiency.

In this blog, the UK’s leading company formation agent, 1st Formations, explores the X benefits of setting up a limited company in the UK. 

Limited liability 

The main benefit that limited company owners enjoy is limited liability. This simply means that should your company face any financial or legal trouble, your personal assets are protected. 

That’s because a limited company is a separate legal entity, its own ‘person’ in the eyes of the law that’s responsible for its own finances. 

Shareholders and directors own and manage the company on its behalf, but legally, they are completely individual entities. This is known as the ‘corporate veil.’ 

If the company suffers losses or damages, each shareholder is only liable to pay the nominal value of their shares. The nominal value is commonly £1, so your liability could be as little as that, depending on how many shares you hold. 

Meanwhile, sole traders, for instance, don’t benefit from limited liability. As there is no legal distinction between the owner and the business, they are personally responsible for the entirety of the company’s finances, putting themselves are much greater risk. 

Tax advantages 

Limited companies also offer tax efficiency and planning. Unlike sole traders who pay Income Tax on their earnings, limited companies in the UK pay Corporation Tax, which is charged at a lower rate. While sole traders pay 20-45% in tax, limited companies pay 19-25%, allowing you to retain more of your profits and make tax planning more flexible. 

You also have various options for utilising any surplus income the company makes. Rather than withdrawing it or retaining too much of it and facing significant tax issues later down the line, you could: 

• Make early repayments on any business loans 
• Reinvest it in the business 
• Issue dividends 
• Contribute to a pension pot 
• Make charitable donations 

Affordable 

The UK is one of the cheapest countries to set up a limited company in. Even with the recent Companies House fee rises, it still only costs £50 to incorporate a business in this country. 

Meanwhile, Venezuela, the UAE, and Italy are among the most expensive, where incorporation costs around £9,000, £5,000, and £3,000, respectively. 

Quick and easy 

The process of setting up a limited company in the UK is quick and easy. Given that your application is error-free, your business could be up and running in less than 24 hours. Some are even incorporated in as little as three to six hours. 

In the US, for example, the most popular company structure is an LLC, which is the American equivalent of an LTD. While they’re similar, the LLC setup process is more complicated and generally takes a few weeks. 

Protect your company’s name 

Limited companies in the UK are subject to certain rules and criteria when it comes to choosing their company name. For instance, it must not be the same or similar to an existing company’s name. 

These rules protect your company’s identity and ensure that no one else can steal your image or reputation that you’ve worked hard to build. Sole traders, on the other hand, run the risk of another business operating under exactly the same name without the legal protection that limited companies have. 

Credibility and trust 

Limited companies in the UK are generally seen as more professional and trustworthy than unincorporated businesses. One of the main reasons for this is that limited companies are governed by the Companies Act 2006, while self-employed individuals are not subject to any such stringent laws. 

As a result, incorporated businesses express governance, compliance and, therefore, credibility. Some industries even favour limited companies for this reason, often making it tricker for contractors to secure clients without a limited company. 

Easier access to finance 

When starting a new business, you’ll probably need to apply for funding, and setting up a limited company can help. For example, if you apply for a bank loan, the lender will review your credit history, expecting to see a track record of reliability and trustworthiness to meet your repayments. 

This can be much easier to do with a limited company due to its separate legal status we explained earlier. This means its finances are distinct from your personal accounts, and the company itself can take on debt obligations and enter contracts without you, the owner, being personally responsible. 

Exit options 

Limited companies also have greater flexibility in terms of exit—again, thanks to their separate legal existence. If a self-employed individual wants to stop trading, they simply close up shop, and the business ceases to exist. 

However, you can sell a limited company if you wish, make it dormant, or transfer ownership. You can, of course, close the company, too. But if your circumstances change or you no longer want to run the company, you have several exit options. 

The bottom line 

Setting up a limited company in the UK offers a range of benefits, the main one being limited liability. It’s also cheaper, quicker, and easier to start a company here than in most other countries. Plus, it’s tax-efficient, easier to obtain funding, and comes with more flexible exit strategies. 

Ready to start your limited company? 1st Formations can help. They are a market-leading, Companies House-approved company formation agent offering affordable and convenient packages starting at just £52.99. Visit the 1st Formations website, choose your ideal package, and see your company come to life today.