What are the advantages of forming a company limited by shares?

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My name is Charles, and I am currently doing full-time childcare work as a sole trader. A colleague recently advised me that I would be better off incorporating as a limited by shares company, but she couldn’t really give me any good reasons. Can anybody give me a brief rundown of the advantages I might enjoy from forming a limited company? Thanks in advance.

Answers

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The main advantages of forming a limited company are:

  • Protection of personal finances - Limited companies provide ‘limited liability’ to their owners. This basically means you will not be held personally liable for the company's debts - you will only be responsible for the value of your shares or whatever you guarantee to pay the company if it becomes insolvent.
  • Professional status - Limited liability status is an effective way to boost your professional reputation and credibility. This creates the impression of a business that is grounded, dedicated and reliable. It is very appealing to new clients and investors, so it can be an effective way to attract new customers and expand your business.
  • Efficient tax-management opportunities - Limited companies can be really tax-efficient, which can be beneficial for a business as a whole as well as its individual directors and shareholders. A company only pays 20% Corporation Tax on its profits, instead of the higher rates of Income Tax payable by sole traders - if you own and manage a limited company, you may be able to reduce your personal tax liabilities by paying yourself a lower salary and higher dividends.

In addition to these three main benefits, a limited by shares company will also allow you to sell shares to other people if you need to raise finances and protect the name of your business.

a year ago
 

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