Ten Advantages of Forming a Limited Company in the UK

Last Updated: Mar 22, 2021
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For a sole trader, it can be a big step to take to go from being self-employed to becoming the director of your own Limited Company.

While being a sole trader is still the most popular way to run a business in the UK, there are undeniable advantages of taking your business a step further and operating as a fully fledged limited company.

What is a Sole Trader

Setting yourself up as a self-employed sole trader is a really simple process. This is why so many thousands of new sole traders choose this route each year. You can register for Self Assessment online with HMRC and be issued with a personal tax code reference number.

You will need to set up as a sole trader if:

  • you earned more than £1,000 from self-employment between 6 April one year and 5 April the following year
  • you need to prove you’re self-employed, for example, to claim Tax-Free Childcare
  • you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits

At the end of the tax year, you simply account for your business income and outgoings through the annual self-assessment system and pay HMRC whatever tax and National Insurance contributions you owe.

You will be given your own personal online digital tax account where you can keep a check on any benefit payments you are receiving and also submit your figures for your annual self-assessment. You can also pay your tax and NI bill here too.

As a sole trader – you are your own business! This means if you cannot work for any reason, your business may cease to function without you.

Your own personal assets are also at risk too. Should you need to close your business for whatever reason they you will be personally liable for all of your business debts. This means that you could risk losing your personal assets such as your car and home to clear any company debts.

Why should I consider forming my own Limited Company?

Going through the company formations process to set up as a Limited Company does involve a little more work than simply registering as self-employed. There are also more financial and statutory administrative duties to perform with operating a limited company, but these extra tasks are well worth the effort to gain the many advantages of Limited Company status.

Let’s take a look at ten good reasons why you should consider forming your own company in the UK today rather than staying registered as self-employed.

Tax advantages

As a registered Limited Company you are likely to pay less personal tax than a self-employed sole trader.

Your limited company profits will be subject to corporation tax, which for the current 2018/19 tax year at the time of writing is set at 19%. There is also an aim to get this rate down to 17% for April 2020.

As a director of your own company, you can opt to take a small salary from the business and then take more income in the form of shareholder dividends. By doing this you can effectively reduce the amount of National Insurance Contributions (NICs) you will need to pay.

As limited company dividend payments are taxed separately, they are not subject to NIC payments. This means that you could end up taking home more of your earnings from your business.

Your company will be an entity in its own right

A registered limited company will have its own distinct entity that is entirely separate from you. This means that everything held in the company name from its own business bank account to loans, credit agreements and assets is completely separate from those of the company shareholders.

This means that your own personal assets will be protected should the business need to fold for whatever reason (other than when there are criminal activities involved such as fraud).

Limited Liability protection

A sole trader has no limited liability protection so they will be held personally responsible for paying back any debts run up in their business name. However, with a limited company, you get ‘limited liability’ protection.

With limited liability protection, any financial losses made by your business will be paid off by the company rather than you personally. This may involve selling off your company assets and recovering security deposits to pay off creditors, but your own personal money or assets will not be touched.

Professional image

There is no doubt that forming your own Limited Company will give your business a more professional image. This can help greatly to build customer trust and belief in your products or services.

There are many large companies that will refuse to do business with you as a sole trader but will be happy to work with you if you run a limited company.

Better business financing

Funding your business with necessary credit, financing and business loans becomes much easier as a limited company. You will find there are more options open for you to secure business finance and many lenders will grant you more favourable interest rates and repayment terms because of your limited company status.

Protected business name

As part of your company formations process, your business name will be registered with Companies House and placed onto the official register of companies.

What this means is that once your name is registered, it becomes protected by UK law and no-one else can use your business name to trade under. Not only that but no-one can trade under a name that is deemed to be too similar to your registered company name, especially if their business is almost identical to yours or operates in the same business sector.

This is great because you will know that no-one can undermine your business by pretending to be you to temp away your customers or set up in direct competition with an intent to confuse customers and ride off the back of your hard work and success.

Business Costs

There is a common misconception that setting up your own limited company is a very costly process that involves hiring a solicitor and drawing up legal business documentation.

It honestly surprises most people to find that you can actually set up your own limited company from as little as £7.48 for our digital package. There is also no need to hire in expensive legal help either!

By using a professional company formations service such as Your Company Formations, you will get the benefits of working with a team of experienced formations experts that have been working with Companies House for years from our London-based offices.

With our help, you can have your own limited company set up quickly and smoothly usually within one working day!

Shareholder options

As a sole trader, you can set up your own limited company with just yourself as the director and the company shareholder. Officially you only need to have one single shareholder to form a company, so just because you operate on your own doesn’t mean you cannot form your own company.

Further down the line, you may wish to look at issuing shares to inject some cash into the company. You can issue various classes of shares and each share class will have different rules and responsibilities. You can decide on what voting rights your shareholders have and how much control they have within your company by drawing up your own shareholder agreements.

Pension contributions

As a limited company, your business can fund your executive pension and claim it as a legitimate business expense. What this means is that you will be gaining a huge tax advantage that wouldn’t be open to you as a sole trader.

Legacy issues

Let’s say that you were to meet with an unfortunate accident that leads to your death or leaves you unable to work. As a sole trader, you can understand how devastating this would be.

However, if your business is set up as a limited company you can put plans in place to transfer ownership of your company to another person.

Should you choose to retire, you can sell your shares to other shareholders or family members so you can retire knowing that all of your hard work building your business hasn’t been a wasted effort and it will live on in your absence.


So now that you understand the many benefits of forming your own limited company, why not take a look at one of our formations packages and get your company formed online, quickly and professionally with us.

We are here to help you with any questions you may have – feel free to contact our friendly team for more information.

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