Many people assume that being a limited company is essential for business success. However, that’s not always the case. Whether your business is best suited to being a limited company, a sole trader or another entity, such as a Limited Liability Partnership, will depend on what you’re doing and how you want to operate. Limited companies have advantages in some situations – and disadvantages in others.
The disadvantages of forming a limited company
Registration and accounts – if you’re going to call yourself a limited company then you need to go through the process of registering with Companies House, which may involve a fee. Being a registered company also introduces a requirement to maintain regular accounts, which are more complex than those for a sole trader.
Company information is public record – this may be more problematic for some than for others.
Ownership can get complex – limited company ownership is determined by shares and there are rules set out as to how these shares can be distributed. If you’re trying to get cash out of the company you must also follow the officially prescribed procedures, rather than simply taking it out of the business bank account as you might as a sole trader.
The advantages of forming a limited company
You have limited liability – this is the biggest advantage of being a limited company. It means that you and the business become separate entities. So, should anything go wrong, whether it’s the business being unable to pay its debts or being sued, you are protected. In most situations your own personal assets can’t be pursued if something goes wrong with the business.
It’s more impressive – a limited company has a far more professional appeal than a sole trader and tends to mean customers and clients perceive your business as more trustworthy.
A limited company is far more tax efficient – corporation tax in the UK is currently around 19% – 21%, whether profits are £150,000 or £1.5 million. Sole traders on the other hand pay tax on the basis of personal income. So, that’s a basic rate of 20% on any income up to £33,500, then 40% on income between £33,500 and £150,000 – and for anything above that the rate is 45%. Incorporating as a limited company offers a myriad of ways to save when it comes to taxes to ensure that your income is as tax efficient as it can be.