In today’s fast-paced world, where tax regulations are constantly evolving, it is wise to choose an ideal and sustainable business structure to leverage tax optimisation and profit-generating benefits. In this regard, a limited company is one of the widely popular and advantageous entities, offering multiple advantages to freelancers, entrepreneurs, and established businesses alike. However, only after carefully weighing the limited company advantages and disadvantages can a business owner make an informed decision if they should opt for setting up a limited company. Accordingly, this guide is specifically created to delve into listing the limited company advantages and disadvantages to provide a fair comparison so that you can determine whether setting up a limited company would be a way to go for your business’s long-term goals.
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Take a Look at the Limited Company:
A limited company is defined as a business vehicle that operates as a distinct legal entity from its owners. Because of its separate legal status, the owners benefit from limited liability protection, meaning their personal assets are not left unprotected. As an outcome, the limited company itself is responsible for its debts and liabilities, contrary to a sole trader or partnership,
In addition, limited companies in the UK primarily exist in two forms:
Private Limited Company (Ltd)
It is a privately owned limited company, which is a good fit for small and medium-sized businesses. Hence, most individuals and small business owners prefer setting up a private limited company.
If you intend to create a limited company, read our blog: How to set up a Limited Company in the UK?
Public Limited Company (PLC):
This limited company is typically larger, with stock exchange-traded shares.
Limited Company Advantages and Disadvantages
The following are the considerable pros and cons of a limited company, comparing which you can easily decide if it is a perfect business structure for your business growth and expansion:
Advantages of Limited Company
Here are the advantages of a limited company:
Reduced or Limited Liability Protection:
One of the most significant benefits of limited company advantages and disadvantages is that it limits your personal liability.
To gain a better understanding of how a limited company offers limited liability, consider the following scenario. Assume you possess some capital and want to inject it to start a business as a sole trader. Now, it is most likely that your business will spiral downward if you have insufficient knowledge or expertise to run it effectively.
Moreover, statistics show that 20% of small companies witness failure in the first year and 30% in the second year when owners’ personal assets are not protected against the incurred debts. That is where a limited company comes into play. By creating a limited company, the only capital that will be exposed to risk will be the investment you poured into the business and not your personal finances.
As a result, if the business venture ends up being a fruitless exercise, your personal finances will remain safeguarded beyond your agreed and initial investment in the business. Instead, the debts will be paid by the company rather than the owner.
It is because a limited company is treated as a separate legal entity from its members and directors: it has its own legal rights and duties.
More importantly, If it goes bankrupt or becomes insolvent (when its liabilities exceed its assets) and is unable to pay its creditors, the members are only financially responsible for the amount they have invested or committed through unpaid shares or guarantees. Other than that, their personal assets are secure.
Ownership and Managerial Flexibility:
Interestingly, a limited company structure has ample ownership and management flexibility. Minimally, it should have
- One member (who can be the owner, shareholder, or guarantor) to own and control it. That member must hold at least one share (becoming a shareholder) or contribute guaranteed money to the company (becoming a guarantor).
- One director to oversee and manage the company on behalf of its member(s) if they lack the necessary expertise to run it themselves.
Notably, a member and a director can be the same person or different people. It signifies that you can set up a private limited company by yourself as the sole member and director or collaborate with other people to run it.
Furthermore, as opposed to the sole trader business structure, a limited company can have several owners and directors during its lifespan. For the purpose of expansion, It can issue shares, and invite new investors and guarantors at any given time. If the existing shareholders decide to part ways with the limited company, they can also sell or transfer some or all of their shares to others. Likewise, following registration (incorporation), members enjoy the authority to appoint and remove directors at any time without much hassle.
In a nutshell, the flexible structure of a limited company allows you to run it at your will. You can conveniently run it yourself or appoint someone else to manage it on your behalf or even sell or transfer ownership of the company.
Tax Optimisation and Increased Personal Remuneration:
Tax efficiency is another key factor when comparing the limited company advantages and disadvantages if you are a sole trader. Sole traders pay income tax on their business profits, while limited companies pay corporation tax.
To clarify, sole traders pay income tax and National Insurance contributions according to their business profits. They do that by filing annual self-assessment tax returns.
It is worth pointing out that the income tax rate and National Insurance contributions are the same as those of a private individual, including the same personal allowances. To illustrate, sole traders pay income tax on their profits at the following rates:
- Basic rate = 20% for £12,571 to £50,270.
- Higher tax rate = 40% from £50,271 to £125,140
- Additional rate = 45% for over £125,140
Contrary to that, a limited company pays a Corporation based on income. Going further, Corporation Tax rates on profits are between 19% and 25% for the limited companies in the UK. Besides, after the deduction of Corporation Tax, a limited company can withdraw the rest of the income in the form of dividends. The dividends are paid from profits. Accordingly, there is no personal tax on the first annual £500 dividend allowance for the 2024/25 tax year.
Although you are required to pay dividend tax if the dividend allowance exceeds £500, dividend tax rates are significantly lower than Income Tax rates. Summed up briefly, by creating a limited company, you can save thousands of pounds in personal tax every year based on your yearly profits.
Increased and Tax-Efficient Personal Remuneration:
Being an owner or director of a limited company, you can considerably lower your Income Tax and National Insurance contributions (NIC) by combining a director’s salary through PAYE with dividend payments from shares.
To elaborate, if you keep the director’s salary below the NIC Primary Threshold. (£12,570), you will not be required to pay any Income Tax or employee Class 1 NIC on those earnings. Notably, the NIC Primary Threshold is £12,570. Furthermore, the Corporation Tax excludes allowable business expenses. It includes wages, which are a tax-deductible business expense. Hence, the limited company won’t have to pay any Corporation Tax on the salary as well.
Similarly, since the dividends come from post-corporation tax income, there is no personal tax on the first annual £500 dividend allowance for the 2024/25 tax year.
As a result, with strategic management of your wages, you can reap the benefits of higher and tax-optimised remuneration.
Higher Professional Credibility and Growth Opportunities:
Unlike a sole trader, a private limited company enables you to conduct your business with elevated professional credibility. Admittedly, incorporated (registered) businesses remain under the wider scrutiny of the relevant regulatory bodies since:
- They are thoroughly monitored and assessed;
- They have extensive incorporating, accounting, and reporting obligations;
- Their statutory compliance requirements are higher;
- Their key business, financial, and account details are publicly accessible on the Companies House register.
Therefore, your professional status soars significantly among investors and clients alike. Similarly, it also makes your brand identity reliable and robust.
Hence, by setting up a limited company, you can attract lenders, new clients and investors, create growth opportunities in new locations or markets, and establish a level playing field with your competitors.
Protection of the Company Name:
In line with Companies House incorporation obligations, all company names must be unique, with no two companies’ names being alike. Moreover, the two companies’ names must not even be similar either. Rather, there are specific criteria that you must heed while choosing a unique name for your company.
Now, once the company is registered with Companies House, no other business can use its company’s name since it has now become a trademark.
More specifically, if Companies House finds a matching or a similar name, it will notify the company and decline the permission. As a result, this increased protection makes it nearly impossible for other companies to sell knockoffs of your products.
Notably, this name protection does not apply to the business name of a sole trader.
In brief, another significant benefit among the limited company advantages and disadvantages is the name protection of your company.
As stated above, tax efficiency is the second key perk among limited company advantages and disadvantages. For greater clarity, under a limited company by shares, you can transfer, share, or split your business profits with your partner or family members to reduce personal tax liabilities. For instance, If you split the dividends (coming from the income after deducting the corporation task), you can leverage the tax-free Personal Allowance and dividend allowance (£500) and basic tax rate.
Disadvantages of Limited Company:
Here are the disadvantages of a limited company:
Extensive Set-Up Procedure:
Although investors consider a limited company as a lower risk on account of it being a registered entity, the process of setting it up is exhaustive and time-consuming since it includes:
- Selecting the company name attentively;
- Appointing the company’s director(s);
- Nominating the shareholder(s);
- Registering limited company with Companies House;
- Preparing the necessary company documents (like the Memorandum of Association and the Articles of Association);
- Maintaining accurate financial records;
- Evaluating the associated costs.
Public Access to the Company’s Key Details:
A limited company’s key business, financial, and account details and records are publicly accessible on the Companies House register. It means that significant company information remains under constant scrutiny and inspection by the public, investors, competitors, and third parties.
Although Companies House ensures transparency and accountability by keeping everything publicly available, it compromises the privacy and confidentiality of the company by disclosing crucial information to competitors, such as its ownership, turnover, or major changes made in the company.
Increased Administrative Burden and Record-Keeping:
Depending on the nature of the business, a limited company can have several directors to oversee and manage its day-to-day operations. Moreover, a private limited company must keep records of company activities (lists and information of directors, shareholders and voting decisions), financial records of all transactions, and records of persons of significant control (PSC). A secretary could also be appointed to assist the director in ensuring the smooth execution of tasks.
Undeniably, all the strict record-keeping and compliance obligations unnecessarily increase the administrative burden alongside the associated costs, which is a drawback among the limited company advantages and disadvantages.
More Filing and Reporting Obligations:
A limited company has more strict filing and reporting obligations than a sole trader. To illustrate, you must comply with relevant regulations by maintaining accurate business records, filing annual accounts and confirmation statements with Companies House, paying corporation tax, and filing tax returns with HMRC.
Bottom Line:
Summing up the argument, the above-cited elements list the limited company advantages and disadvantages in a stark manner to help you make a heady decision about the right structure for your business. Nevertheless, the advantages of setting up a limited company outweigh its disadvantages, which should be convincing enough for you to consider setting it up. In this connection, Accountingfirms is the most appropriate platform for this.
We are immensely proud to state that we are the first comparison website in London, allowing you to compare the tax and accounting costs irrespective of where you are based in the UK. You can conveniently select your required services based on your budget and get an instant quotation for a comprehensive and personalised consultation.
On what your business goals are.
Hence, go to Accountingfirms today if you want to go from a sole trader to running a limited company and cashing in its benefits.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.