Many people assume that being a limited company is essential for business success. However, that’s not always the case.
The type of structure that will best suit your business depends on what you do and how you want to operate. There are three main types of business structure: limited company, Limited Liability Partnership (LLP), or sole trader.
Limited companies have advantages in some situations – and disadvantages in others.
The advantages of forming a limited company
This is the biggest advantage of being a limited company. It means that you and the business become separate legal entities.
If your business becomes unable to pay its debts, you will be protected. In most situations, your own personal assets can’t be pursued if something goes wrong.
A limited company has more professional appeal than a sole trader. Customers and clients will perceive your business as more trustworthy and it should be easier to attract investment.
In the UK, limited companies pay corporation tax on their profits. The current rate of corporation tax on is 19%. Plans to reduce the rate to 17% were recently scrapped by the Government.
This offers limited companies a big advantage on tax compared to sole traders, who pay tax on the basis of their income. The basic rate of income tax is 20%, rising to 40% on income more than £50,000. Sole traders who earn more than £150,000 are charged the 45% additional rate of income tax.
Incorporating as a limited company will reduce your business’s tax burden. You’ll also be able to claim a dividend, which is tax-free up to £2,000 and doesn’t require National Insurance contributions.
The disadvantages of forming a limited company
Registration and accounts
If you’re going to set up your business as a limited company, then you’ll need to go through the process of registering with Companies House. This can be done online for a £12 fee – and if you choose Appleby Mall as your accountant, we’ll cover it for you.
You’ll also need to maintain accounts. These need to be filed with HMRC and submitted to Companies House annually.
Company information is public record
Some of your company directors’ details will be publicly available on the Companies House register. This may be more problematic for some than for others.
Ownership can get complex
Limited company ownership is determined by shares. There are rules for how these shares can be distributed.
If you want to take cash out from the company, there are also procedures to follow. Sole traders are able to simply withdraw money from the business bank account.
How Appleby Mall can help
If you’re considering registering your business as a limited company and would like some help, get in touch with us and we can discuss the right options for you.