When starting a business, one of the most important decisions you will face is which business structure to choose. The most common options are operating as a sole trader or forming a limited company.
Each comes with its own advantages and disadvantages, and making the right choice for your situation can affect everything from tax efficiency to your personal liability and even how potential clients perceive your business.
Let’s get cracking and explore the limited company advantages and disadvantages, helping you make an informed decision.
Don’t have time? Here’s the wrap-up of this article in less time it takes to eat a taco 🌮
▪ Limited companies offer tax advantages and limited liability.
▪ Owners enjoy greater tax planning opportunities and can protect their personal assets courtesy of company law and limited liability.
▪ Limited companies can claim dividends and expenses, improving tax efficiency.
▪ There’s more administrative work, including filing accounts with Companies House and HMRC.
▪ Sole traders have simpler tax obligations but face higher personal liability.
▪ Public information and the need to file detailed accounts can be a drawback for limited companies. n.b. Stay Sharp, Stay Savvy and Keep Winning.
Skip right to…
- Advantages and Disadvantages of a Limited Company
- What Is a Limited Company?
- Key Advantages of a Limited Company
- 1- Limited Liability Protection
- 2- Tax Efficiency and Planning Opportunities
- 3- Claiming Expenses
- 4- Professional Image and Credibility
- 5- Protection of Company Name
- 6- Investment and Lending Opportunities
- Disadvantages of a Limited Company
- 1- More Paperwork and Administration
- 2- Public Disclosure
- 3- Costs of Setting Up and Running a Company
- 4- More Complex Tax Filing
- Are There Different Types of Limited Company Structure?
- Is a Limited Company Right for You?
- Conclusion: Making the Best Choice for Your Business
Advantages and Disadvantages of a Limited Company
What Is a Limited Company?
A limited company is a separate legal entity from its owners, meaning the business has its own rights and responsibilities, separate from those of the shareholders or directors. There are different types of limited companies, including private limited companies, public limited companies, and private companies limited by guarantee.
This separation is a major part of what makes limited companies appealing, especially when compared to sole traders, who are not distinct from their business from a legal standpoint. The limited liability feature protects personal assets in the event the company runs into financial trouble or debt.
Key Advantages of a Limited Company
1- Limited Liability Protection
In owner managed businesses (OMBs), most of you, the company director is the main shareholder of the business. One of the main advantages of running your business as a limited company is the limited liability it offers.
This ensures that if your business faces debts or legal claims, your personal assets remain protected. As a sole trader, you could be held personally liable, meaning creditors could pursue your home, car, or savings if things go wrong.
2- Tax Efficiency and Planning Opportunities
Limited companies often enjoy company tax advantages compared to sole traders. Corporation tax on profits is lower than income tax rates for individuals. The current corporation tax rate for small companies is between 19% and 25%, while sole traders pay income tax of 20% to 45% on profits. By paying yourself through a mix of salary and dividends, you can minimize your personal tax liability.
▪ Dividends are taxed at a lower rate than salary, and as a business owner, you can take advantage of the dividend allowance £1,000 in the tax year ending April 2024 (£500 for the 2024/25 tax year).
▪ You can also reinvest profits or defer withdrawals to take advantage of lower income tax rates in future years.
3- Claiming Expenses
When running a limited company, you can claim a broader range of allowable expenses compared to a sole trader. Expenses such as business insurance, accountant fees, equipment purchases, and travel can be deducted from your company’s taxable income, reducing your tax bill.
HMRC allows you to offset these expenses against corporation tax liability, keeping more money in your business. Another added advantage of a private limited company is that it gives you a tax efficient opportunity to start saving for the future through a company pension scheme. Pension contributions made through the company either for the directors or employee is an tax allowable expense.
4- Professional Image and Credibility
Clients and suppliers often see limited companies as more credible than sole traders.
Limited companies are subject to stricter regulations, and having a company name registered with Companies House can enhance your business’s reputation. Many larger clients prefer working with limited companies, especially in industries like IT, finance, and construction.
5- Protection of Company Name
Once you register your company name with Companies House, no other company can use the same or a similar name, offering protection against competitors infringing on your brand. Although, bear in mind that this is somewhat limited in scope. You have a stronger case for a cease and desist and arguing your ‘name’, but to strengthen this case you may consider registering your trade mark.
6- Investment and Lending Opportunities
Operating as a limited company provides a good gateway to raining funds. Shares in the business can be sold to raise capital, a benefit unavailable to sole traders. This gives your business more opportunities to grow by attracting investors or securing larger loans.
Banks and other lenders are also more likely to provide financing to incorporated businesses.
Disadvantages of a Limited Company
1- More Paperwork and Administration
One of the disadvantages of a limited company is the increased administrative burden. You will need to file annual accounts with Companies House, submit a corporation tax return to HMRC, and keep detailed records.
This can be time-consuming and often requires hiring an accountant to manage your tax affairs.
2- Public Disclosure
As part of the requirements of operating as a limited company, details such as your company’s financial accounts, shareholder information, and directors’ details are available to the public. This information is freely available on Companies House for any limited companies registered in the UK.
This can be a concern for business owners who prefer to keep their financial information private.
3- Costs of Setting Up and Running a Company
Forming a limited company costs money, unlike setting up as a sole trader, which is free. There are incorporation fees, accounting costs, and expenses for filing annual returns and tax submissions. However, these expenses can often be claimed back to reduce your overall tax burden.
4- More Complex Tax Filing
Filing taxes is more complex for limited companies. You need to submit both corporation tax returns and personal tax returns. If you pay yourself a salary, this also involves running PAYE and paying National Insurance Contributions (NICs), which adds to the paperwork.
Are There Different Types of Limited Company Structure?
Well, of course!
There are four main types of limited companies in the UK:
1- Private companies limited by shares (the most common)
2- Private companies limited by guarantee
3- Private unlimited companies
4- Public limited companies
Each has different rules and requirements. Private limited companies are most common among small business owners.
Is a Limited Company Right for You?
Choosing between a limited company and sole trader structure depends on your business’s specific needs. If you want limited liability, greater tax efficiency, and the potential for investment, a limited company might be the best choice.
However, if you prefer simpler tax returns and fewer administrative tasks, operating as a sole trader could be more appropriate. We help you with both.
Conclusion: Making the Best Choice for Your Business
When deciding whether to incorporate as a limited company, it’s essential to weigh the advantages and disadvantages carefully. The limited liability protection, tax savings, and professional credibility are significant benefits, but they come with increased paperwork and public disclosure.
It may not be an unpopular opinion, but we believe everyone should have a limited company.
Managed well the advantages outweigh the disadvantageous. The biggest barrier to entry of course being ‘How do I take care of everything?’
Getting set-up is, for the most part, a 45 minute job. But what then?
At OMB Connect we back entrepreneurs to success, and our program is designed to walk you through a step-by-step process on how to incorporate a limited company, manage it, grow, carry out the bookkeeping, register for taxes like PAYE, VAT and CIS, and ultimately file your own company accounts and tax return. All the while, offering the same for sole traders and self-assessment tax returns.
Are you in, or are you in?