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Benefit of limited company vs being self employed

Posted on 9 June 2014

If you are starting a business, first you need to decide what kind of legal structure you should work under. Deciding whether to work on your own or start a limited company can impact the amount of taxes, but can also influence the way you manage your business and the personal liability you face.

You should always consider discussing your business with an accountant before deciding upon the right decision for your business, as the general recommendations may vary from one business to another. Here are some things you should bear in mind when deciding what business structure you should use for your venture.

Advantages of being a Limited Company:

 

Less tax

The most important element that may attract freelancers is that the two types of legal structures are taxed in different ways, so if you choose to start a Limited Company, you are likely to pay less personal tax than a self employed.

The savings can, of course, depend on profit and also on individual circumstances, but in most cases a Limited Company will help you save tax and national insurance. As a Limited Company, you have to pay 20% tax for profits over £7,605 as opposed to 20% income tax, 9% national insurance and £2.65 a week class 2 National insurance if you are self employed.

Still, becoming a Limited Company means more responsibilities, fees of £200-£250 + vat and higher accounting fees of £500-800 + vat so you have to consider all these aspects before deciding the legal structure you should choose.

 

Distinct Entity

While business and personal affairs of self employed people are always treated ‘as one’, a limited Company has a separate legal entity, so you can choose to take a small salary and take your incomes as dividends, wile as a self employed all your profits are taxed.

Many people prefer to start their business as self employees because the start-up and running costs are perceived to be lower, but the actual price of setting up a company is minimal, and if you plan to start a long term business, in time you will save more money.

 

Limited Liability

If you run a limited company, you will not be personally liable for any financial losses made by your company. This can also mean that if you get into financial difficulty with the Company, your personal assets will still be safe. Also, it is easier to transfer the ownership of a limited company.

 

Credibility

Also, you may bear in mind that people seam to believe a Ltd Company is a more trust worthy entity, and this may lead to higher chances of more valuable contracts or bigger assignments. If you are providing services, you may find that most clients would expect you to trade via your company.

If starting a Limited Company seems a lot to handle, you can always start as a self-employed and, after a few years, if you are successful and you plan on keeping your business for a few more years, move on to start a limited company.

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