Advantages and Disadvantages of a Limited Company

A Limited Company (Ltd) is a type of business structure in the United Kingdom. It is a separate legal entity from its owners, meaning it can enter into contracts and own property in its own name. Incorporating your business as a limited company has several advantages and disadvantages, which we will outline in this blog post.

Advantages of a Limited Company

Easy and low cost set up

Limited companies are very easy to set up now, they can be registered within 3 hours of filling in a quick from and paying a fee of anywhere from around £20 to £100 depending on who you use to set up the company. There are a variety of formation agents out there, or you can do it yourself with Companies House, making it is cheap and easy to do

Tax efficiencies 

The reason many people chose a limited company is the tax efficiencies that they believe that it brings - and that is very true - as long as tax planning is done, then a limited company is tax efficient as long as the profits of the business exceed £20k a year. Now note, that I said profit here and not revenue. So it might be that in the first few years of business especially, you might not be passing that £20k level and I’ll speak more about that when we go through the advantages of a sole trade.

Limited Liability 

What that means is that your personal assets are usually not at risk.
I say usually, because a limited company does not 100% protect you. If fraud is discovered in your business you can find a personal claim again you for example. And also, for lending, banks can often ask for a personal guarantee from the director and so put yoru personal assets in the firing line.   Fundamentally with a limited compnay though, you and your business are separate legal entities and therefore are treated as such.

Multiple shareholders and directors.
If you want to make a family member or friend a shareholder in your business and let them benefit from dividend payouts - you can do that with a limited company. If you plan to grow and take on other directors to support you - you can do that too. It’s more flexible in how people can come in and participate in your business.

Credibility. 

Even with the ease of setting up a limited company, many people still believe that dealing with a limited company is somehow safer than dealing with a sole trader. You might also find, depending on your clients and industry, they insist on only dealing with a limited company.

Legal name protection 

You can protect your business name, to some extent by registering it with Companies House as they business name. It is important to note, however, this is not the same as trademarking your name, and should not be seen as protection from Trademark infringements - just having a name registered at companies house does not automatically mean you’d win a trademark case.

Easier to sell

Limited companies can be sold in their entirety to someone else or to another entity - so if you plan an exit via a sale then the limited company is for you

Pensions

With a limited company, you can invest pre-tax trading income into your pension which is a big advantage. With a sole trade, it is post-tax earnings that you would have to invest.

Eligibility for Statutory Maternity Pay (SMP)

SMP can be paid when you are an employee of your limited company but it’s not paid to those who are sole traders. There is something called Maternity Allowance which “might” be able to be claimed when you are a sole trader but it’s not guaranteed.

Disadvantages of a Limited Company

Lack of Privacy

When you run a limited company there is certain information like name, address etc that are public records, along with the summary financial information of your business.  

Costs

As you have the requirement to submit annual accounts to Companies House, a corporation tax return to HMRC, a Confirmation Statement to Companies House, and a Personal Tax return to HMRC each year, many business owners decide that they do not wish to do this themselves and therefore engage an accounting firm to do this, which incurs a cost.
Advantage 3 is that a sole trade is typically cheaper to run - the affairs are usually more simple, there are fewer filing requirements and so the cost of compliance is often less as well.

Takes a bit of admin to close down

If things don’t work out, or you are set to retire, it is easier to close down a sole trade operation than it is to close a limited company.  

Annual fees 

With a limited company, there are annual fees to pay when you file your annual confirmation statement (£13).


Restrictions on the company name. 

With Companies House there are some restrictions on the name you can choose for your business.

So, there you have it - the advantages and disadvantages of a limited company. Ultimately, whether or not setting up your business as a limited company is the right decision for you will depend on your individual circumstances. If you're still not sure which business structure is right for you, we recommend speaking to an accountant who can advise you further.

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