What is a limited liability company, anyway?
According to Companies House a limited liability company is “an entity in its own right”, and as such the company will exist beyond the life of its shareholders.. Assuming no fraud has taken place, ‘limited liability’ means you will not be personally liable for any financial losses made by the business.
Without further ado, let’s see the list!
Tip #1 – Only 19% tax rate applies to limited companies
It will be surprising to know that the corporation tax rate for limited companies was up to 30% only a few years ago. However, this tax rate has slowly reduced, falling to 22% in 2011 and 19% in 2017.
There were plans to reduce it to 17% in 2020; however, the government decided not to proceed with this tax cut. Therefore, the corporation tax will remain at 19% at least till 31st of March 2022.
Top tip: Northern Ireland is looking to reduce its corporation tax rate to a meagre 12.5%. Corporation tax powers are waiting to be devolved over to the Northern Ireland assembly. The Corporation Tax Act was given the royal ascent in 2015; however, devolution has not yet occurred. It is also worth mentioning that the once flagship policy of Northern Ireland has been put on the back burner under the current government policies. So, it is advisable to keep an eye out for any changes in the future.
Tip #2 – Limited companies may run multiple companies to avoid higher taxes
It used to be the case a few years back that business owners used to get penalised for opening multiple companies.
Once a business reached £300k it would come under the small profit band. However, if you had a couple of companies, this threshold would get divided equally, causing each company to pay tax at the small business profit band at £150k instead of £300k.
However, today having associated companies to avoid paying higher tax by spreading profits is accepted and has become a general practice.
It makes sense for businesses with a diverse portfolio to keep each category of trading in its own distinguished company, helping business owners to make better decisions, and in the future, to sell easily.
You may be wondering, well, if the tax rate is set at 19%, what’s the relevance of having multiple companies now?
Well, you are correct in saying that the associated company rules are not relevant any more regarding determining the tax rate. However, it can be applicable in other areas.
Once tax reaches £1.5m in profits, a company is required to pay in instalments. Let’s suppose we can apply the associated company’s model here. In that case, £1.5m will be divided amongst all associated companies in the group (One company owning 51% shares 4 subsidiaries, all 5 companies will be classed as associates).
Tip #3 – Limited companies can save taxes
Considering a limited liability company pays corporation tax at 19%, the business owner, while extracting cash, will also be slapped with a tax bill. This will consist of income tax and national insurance, along with a tax on dividends.
From the outset, it may seem that a company will be worse off than a self-employed individual, with only income tax and national insurance to worry about. However, it may surprise you to know that as profits grow, limited companies become much better at saving you tax than they would as a self-employed business. This is because unlike self-employed individuals who pay tax on all profits earned in the tax year, company owners only pay income tax on the money they extract from the company.
You would see considerable savings in tax once you reach profits of about £40k; at this point, it would be advisable to see an accountant who can help set up a company.
Even though there are tax savings as your profits grow, due to the recent increase in dividend tax rates, company owners would pay a lot more tax than self-employed after reaching profits of about £250k.
If you are a micro business and your profits stay in the region between £40k to £200k, you would generally save tax running as a company. But again, it would be advisable to see your accountant, who would assess your circumstances and advise you accordingly.
Tip #4 – Minimise personal liability
Do you ever come across the term ‘corporate veil’? I know it sounds rather fancy, and no, it’s not some sort of a curtain that you hang across your window.
The ‘veil’ safeguards you as an individual if somehow the company your run finds itself in troubled waters. All your personal assets will be secure, and no one has the right to take legal action against you. A limited company runs as a separate legal entity and therefore keeps you, as an individual separate from the company.
However, if there are allegations of wrongful trading or fraud, the veil can be pierced; in other words, the courts can make you as shareholder/director liable.
Tip #5 – Professional Status
Suppose you run your business through a limited liability company. In that case, you are generally seen in much higher regard, even though the way you operate and manage your business will be the same as when you were a sole trader.
This different perspective is because companies follow a more stringent set of regulations and are scrutinised far more than individuals running a business.
The regulations are far and wide, from complex accounting and financial reporting requirements to statutory compliance regulations. All companies are required to make their set of accounts public, which directly influences the level of professionalism required from a company owner.
All these things may put you off, but overall, as mentioned, will help you propel a lot further in your business journey.
Just some of the ways it can help you are:
- Accessing loans from banks and other lenders.
- Attracting new customers and giving more confidence to the existing ones.
- Brand loyalty will grow, and your company will take its niche in the market.
- If you are looking to grow into other areas of the country, it will be easy to attract people, as they may have heard of your company name.
- There will be other companies who would be interested in partnering with you.
- If you are looking to exit the business, selling your business would be a lot easier.
If this article has intrigued you in setting up a company, make sure you speak to your accountants, who would advise you much better based on your personal circumstances.