To be a limited company or not to be - the advantages and disadvantages of a limited company

When setting up a business in the UK you will need to decide what structure your business will take to put your idea into practice. The most common business structure over 95% of people choose in the UK is a private limited company.

It is important however to understand the advantages and disadvantages of going Limited, particularly when compared to the sole trader structure. So below we have provided an overview of the many limited company advantages together with a few of the potential downsides.

Advantages of setting up as a limited company

The main reasons for setting up as a limited company are limited liability, tax efficiency and professional status.

1. ‘Limited’ liability

In short becoming a limited company will keep your business and personal finances separate and ‘limit’ your financial liability. This gives you financial security as your personal assets (e.g. house, car etc) are not at risk if your business was to get into difficulties and be unable to pay its’ debts or deliver work.

In a limited company the personal assets of shareholders are protected above the nominal value of their shares. This simply means as a shareholder you will only be required to contribute the nominal value of your unpaid shares - i.e. the value of the shares when they were first issued.

2. Tax efficiency​

Setting up as a limited company also offers several opportunities for tax planning. The bottom line benefit of this is it can increase the amount of money you take home.

  • As a limited company director there are tax benefits available to you, which compensate for the lack of employee benefits such as sick pay, holiday allowance and parental leave. Dividends are, for example, one way directors can make tax savings. Dividends are payable from a limited company’s profits after tax and are an alternative way to pay directors, compared to a normal salary. They are generally taxed at a lower rate than a salary and avoid National Insurance (NI).
  • A limited company can claim tax relief on a wide range of business expenses. Expenses are costs that are incurred solely and exclusively for business purposes. For example, if you use your own car for business purposes you can charge the mileage accrued on business travel to the company which allows you to benefit from tax free fuel. The costs are also tax deductible to the company, so you benefit in two ways. In addition, if you run your business from your home you can claim the claim back the cost of doing so.
  • Limited companies also provide the opportunity to invest pre-tax trading income in a company pension scheme, as opposed to investing withdrawn income in a personal pension after the deduction of business tax and personal tax.
  • In addition, limited companies are only taxed on their profits – currently at a rate of 20% - and are therefore not subject to the potential higher personal tax rates placed on sole traders which can reach 45% in specific circumstances and over 60% on some income.

3. Professional status for your new business start up

Registering your new business start up as a limited company immediately gives it a legal presence and helps to confer a professional status that you are ‘ready for business’. It can also make your inexperienced business look bigger and more credible than it actually is.

This can not only give customers more confidence in your product or service but also demonstrate to investors that you are serious and worth backing. Certain companies also will have a policy of only accepting limited company contractors, so it can on occasion be a necessity.

4. Investment and lending opportunities

In general, limited companies also have more investment and lending opportunities than sole traders.

Assuming your new business start up will want to raise money at some point you will need a company to take advantage of tax efficient options such as the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS).

Disadvantages of setting up as a limited company

While there are undoubted benefits to setting up a private limited company there are some disadvantages associated with limited company formation which need to be stated and should be considered.

1. Takes up more time

A limited company requires administration and there will be administrative duties that you are required to complete which will take time. These include:

  • A confirmation statement and annual accounts which must be filed at Companies House each year.
  • A company tax return and annual accounts which need to be sent to HMRC every year.
  • Record-keeping requirements which you need to adhere to, including the taking minutes of meetings and the recording of all decisions taken by directors and shareholders.
  • Maintaining a number of statutory or company registers and records and making them available for public inspection at your registered office.
  • Notifying Companies House if you make any changes to your company details – e.g. change of registered office address, change of director etc

These administration duties are typically not overly onerous but while you are developing your ideas and model, testing the waters, and refining, these administrative tasks may be ones you consider you can do without.

Setting up as a sole trader by comparison is one of the simplest things to do in terms of registration and administration. Accounting requirements are minimal and there are only basic paperwork and record-keeping requirements.

2. Money

Sole traders typically have very low start up costs and expenses. As a sole trader you will also own all business profits and assets and it is easy to remove profits for personal use, although as mentioned above this can lead to higher tax liabilities.

By comparison the price of setting up a company at Companies House can range from between £15 to and £100 while filing a confirmation statement to keep the company registered currently costs another £13 each year.

Limited companies also have more complex accounts and so your accountancy fees will likely be greater compared to those of a sole trader.

It is important to remember though that as a sole trader you would be wholly and personal liable for all business debts and liabilities. This is because there is no legal distinction between your personal and business finances and so your home and other assets will be at risk if you are unable to meet your business’ financial obligations.

In additional whilst simplicity means you save time and money in the beginning starting out as a sole trader there are potentially significant additional documentation requirements, costs and time outlays down the line if things change.

Incorporating an existing business – i.e. changing from a sole trader to a limited company in the future – will inevitably involve professional fees to ensure there are no tax consequences associated with ‘selling’ the business to the limited company. You will also need to legally transfer any assets (e.g. Intellectual Property (IP) in logos, websites, domains etc) to the new company. Finally, there will also likely be an administrative burden in changing any existing contracts, supplier and/ or customer accounts from the sole trader business name to the new limited company name.

3. Reduced privacy

As a sole trader there is no requirement to disclose accounts or personal details on public record. There is also no requirement to make business records available for public inspection.

By comparison as a limited company Companies House require certain company records and accounts become public record and as a result they can be accessed by anyone. More detailed information about directors and shareholders can also be viewed, but access to these details can be limited.

One final thing to note is that in relation to Value Added Tax (VAT) the rules are for a sole trader and a limited company are the same. Both types of structure should register for VAT with HMRC when sales of vatable supplies are greater than £85,00 or if you know that you are going to exceed that threshold within 30 days. The only difference, and as we have already noted, is that as a limited company you will not be personally liable for the VAT compared to as a sole trader.

Final thought

For many people starting a business, the decision between sole trader and limited company will be an easy one. However, every business is unique. So, to make sure you choose the best structure make sure you base your decision on your own personal preference and approach to financial risk, your business objectives and long-term plans.


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