Pros and Cons of a Limited Company

Sole trader. Joint partnership. Limited company. They all have their advantages and disadvantages as corporate structures in the UK. Today we’re focussing on the potential benefits and pitfalls of starting a limited company.

Here’s What We’ll Cover:

What Is an Ltd Company?

The Pros of Trading as a Limited Company

The Cons of Trading as a Limited Company

Key Takeaways

What Is an Ltd Company?

A limited company is a type of corporate structure.

This business structure allows for the business to become its own legal entity. It’s completely separate from the directors and shareholders. They have no personal liability for the business debts or business profits.

The Pros of Trading as a Limited Company

• Your business is a separate legal entity from you

By registering your business as a limited liability company, you are no longer personally liable for any business debts. If the company is sued, it’s not your personal assets that are in jeopardy.

• Shareholder liability is capped at the amount of share capital they have

If you’re a sole trader, you have unlimited liability for whatever the business does. If the business goes under while you owe a lot of debt, your house could be repossessed. That’s a huge danger with sole proprietorships.

Limited liability companies cap the shareholder liability to the shares they hold in the company. That means that debtors can’t chase shareholders’ personal income.

• Floating charges can make it easier to obtain loans

If you’re looking for some startup capital, it might be easier as a limited company. Why? Well, banks can secure the debt as a floating charge against the company assets. A floating charge is a security line over non-constant assets.

• Limited companies sound more legitimate

Having an “ltd” after your business name gives a certain air of professionalism. Clients and suppliers may be keener to work with you if you have an incorporated company.

• You can sell the company or part of it easily

Because your company is built on shares, you can transfer ownership very simply. All you need to do is sell shares in the company for others to partially or fully own it.

• Tax advantages

The tax benefits of a ltd company is debatable. You typically pay lower national insurance. Corporation tax is also much lower than the personal tax rate. That said, you do have double taxation as a company director. The business income is taxed and then your taxable income is taxed too. You can offset this however with shareholder dividend income.

The Cons of Trading as a Limited Company

• The process to incorporate a limited company is much more complex

Starting a sole tradership is very simple. It can take about 10 mins to complete on the HMRC website. All you need to do is submit a self-assessment at the end of the tax year. Registering as a limited company is far more complicated. You have an upfront fee and a ton of paperwork to produce before your business lives in the company’s house.

• Withdrawing cash is more complex

Because the business’ money is separate from your own, there are tax implications if you dip into the business account. Everything needs to be accounted for correctly on your ledger. If not, you could face fines.

• There’s a lot more accounting admin when running a limited liability company

Your bookkeeping has to be relatively perfect when it comes to ltd companies. Any mistakes are huge red flags to the HMRC. Your accounts, including detailed records of limited company expenses, are also visible to anyone, as they are freely available as public records on Companies House.

But that’s where we come in! FreshBooks offers a complete accounting solution for limited companies in the UK. You can sync your business accounts to the system. From there, you can categorise all of your expenses into HMRC Recognised categories. At the end of the tax year, we’ll automatically generate your balance sheets and tax return for submission.

If you do choose to have a professional accountant, they can also collaborate with you via our app. For more details on how we can help your business thrive, click this link.

Key Takeaways

A limited company has many benefits and challenges. We hope this article helped you decide whether it’s the right choice for you. It depends on the type of business you run. You may decide that being a sole trader or joint partnership is better for you. Review all of the options before making a final decision.

Did you enjoy this guide? For more business tips, check out our resource hub.

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