10 advantages of setting up a limited company

Many individuals taking the plunge to work for themselves choose to start as a sole trader -- a route most suited to them at that time, thanks to its easy setup and minimal administration.

However, for many who want to operate on a temporary basis, it could be financially and professionally more beneficial to work through a limited company, either from inception or even by switching a business structure from sole trader to ‘LTD’ further down the line.

And understandably so because while there are many, here are just 10 advantages of setting up a limited company, writes Christian Hickmott, managing director of contractor accountancy firm Integro Accounting.

1. It’s more straightforward than you might think!

Of course, a trusted accountant can organise the set-up of your new limited company on your behalf; they’ll be able to offer advice on having a second director, a company secretary, an additional shareholder, guarantors, and the shareholding split, among other areas.

But Companies House do have a pretty simple process for incorporating your new company online if you’d like to manage this yourself (there is also a paper version too if you wish).

After submitting your application to Companies House, their estimate is that your company will usually be formed within 24 hours – although in our experience your new limited company can be ready in as little as just a few hours!

2. Perception and professionalism boost

Particularly for those contracting and wanting to engage with larger organisations, working under your own limited company rather than as a sole trader could open up more opportunities.

It seems the perception from these larger organisations can be that a contractor working under a limited company could be more professional, trusted and accountable than a sole trader. This isn’t to say that it’s true or that one is more professional than the other, but that is the pervading impression in 2024-25.

3. Credibility in the eyes of lenders

Extending from point 2, lenders will likewise consider you extra credible. Indeed, some banks claiming to cater for the self-employed will only consider lending to a limited company! This is largely because the company you form is as a separate legal entity to yourself (the owner), whereas for a sole trader, you and your business are one and the same entity. In this case, as a sole trader, you become personally liable for any debts.

4. Limited liability and a separate legal entity

As mentioned, a limited company is its own legal entity, separate to you, the owner.

Whereas when you’re working as a sole trader, you and your business are the same.

Working through a limited company gives you (as the owner) limited liability.

What does limited liability mean? Well, should the company incur financial problems, then these losses are that of the company, and not yours as an individual.

As a result, your personal finances and assets are protected, and you wouldn’t be liable to pay your business’ debts personally. That is, of course, provided you haven’t signed any guarantees to that effect, and providing you carried out your duties as a director in good faith!

5. You’ll get your own unique trading name and corporate identity

When setting up your limited company, you’ll be able to choose your own business name, which will then be on the Companies House register once incorporated.

The name you choose cannot be one already in use – meaning once you have yours, nobody else should be permitted by Companies House to use it!

Helpfully, Companies House have some guidance on choosing your company name here.

Next, let’s now move to the best bit in our view – the financial advantages of setting up a limited company…

6. Options open up to optimise tax-efficiency

Usually, once your earnings exceed £30,000 per annum, it will likely be more tax-efficient to work through a limited company rather than as a sole trader.

This isn’t a one-size-fits-all rule however, and it might depend on income from any other sources you might have such as other employment, or rental income.

It’s therefore always recommended to seek advice from a trusted accountant who will take these other income streams into consideration.

Your limited company will pay corporation tax on its profits, with yourself paying personal tax on your income taken from the company.

Your take-home pay can be higher due to the fact you can pay yourself via a mix of the appropriate salary and dividend payments, and positively, the latter is not subject to National Insurance.

So, when working as a sole trader, while you wouldn’t have to worry about corporation tax, you could end up paying higher personal tax – you won’t get the option to be tax-efficient. Furthermore as a limited company (also known as Personal Service Company), your salary can be deducted as a cost before calculating your limited company’s corporation tax.

7. You get to receiving salary plus shareholder dividends

To expand on the previous point, as a shareholder of a limited company, you are eligible to receive dividend payments from the company profits (once the company’s taxes, and VAT and other HMRC liabilities have been paid).

The amount of dividend payments you can retrieve depends upon the number and type of shares you own.

By taking a salary, your national insurance record will automatically be triggered for your state pension, but as national insurance is not paid on the dividend payments you receive, this can mean less personal tax to pay than if you received the same total amount but in salary only.

There’s flexibility too. As a company director, you can decide on the best time to distribute the company profits as dividends, which gives you the advantage of timing this across different tax years should this be the most tax-efficient approach, based on your tax band and level of income received.

8. As long as HMRC says they’re allowable, you get to claim business expenses

Claiming allowable business expenses can similarly reduce the amount of corporation tax owed on the business’ profits.

So it’s a good idea to be ‘in the know’ when it comes to what items you can and cannot claim on to take full advantage.

The rules for allowable business expenses for sole traders and limited companies do differ, and your accountant will be able to offer advice on this. But to name just a few you’re entitled to as a limited company director; pension contributions, training in certain circumstances, and even an annual staff events tax exemption!  

9. Strategies for tax planning/mitigation open up  

When working through your own limited company you have more control over the way you will pay yourself. We’ve already touched upon the possibility of receiving a combination of salary and dividends.

Looking at the overall picture of your income, which could be across different sources, your accountant can effectively plan the amount of income, and time at which it is best to receive it. At the same time, you get to utilise annual allowances and benefits available to a limited company, including or via:

Additional shareholder

You may have a spouse or family member also working with you. Considering making them an additional shareholder with a view to utilising their tax allowances.

Pension tax relief

Contributions from your limited company into your pension are an allowable company expense, which in turn will reduce the taxable profit, reducing the corporation tax owed. You’ll also not have to pay income tax on employers’ national insurance on these contributions.

Life and income protection policies

The relevant policies can be classed as an allowable business expense; tax deductible for the company -- again with no NI or income tax applied.

10. You can make the company dormant

If you’ve set up your limited company with a plan to use it further down the line, while perhaps you’re waiting for a contract, or you want to reserve the company name until you’re ready, you can register the company with dormant status.

Opting for dormancy in this way will keep it open, theoretically safeguarding the business name until you’re ready to start trading again. There are some filing obligations for a dormant company though, and details can be found on the government’s website.

What’s not to like?

Limited company directorship is not all plain sailing; there’s duties from Companies House; enforcement campaigns to be aware of from the business department, and rules from HMRC to abide by, including IR35. But these 10 advantage to setting up a limited company are just a flavour of the benefits, options and allowances you can enjoy once your own limited company is formed.

However, if and when you’ve decided that the limited company route is for you, double-check. We recommend talking through your situation with a qualified accountant who’ll take into account your individual circumstances and will pinpoint the best ways forward for you.