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Should I set up a Limited Company?

Updated: Aug 8

This is a question I often get asked from my clients - and it's a good one.

There are many advantages and disadvantages to explore. In this blog post - I've selected my top three of each to consider.


Advantages


Limit your liability

Whilst running your business through a limited company, you enter into agreements in the name of the company rather than you, an individual.

If the company were to run into trouble and could not fulfil its commitments (such as payment of loan interest or rentals) claims are made against the company.

Your personal assets are seen as separate to the assets of the company and this is why this structure is an attractive one to business owners

Under a sole-trade, there is no such distinction and any claim against the business is a claim against yourself.

Pay less tax

Under current tax rules, taking a combination of a salary and dividend from a company can be more tax efficient than a running your business as a sole-trader.

More investment friendly

You may plan to bring investors on board, obtain a bank loan or sell off part of your business. An investor can look to invest in your business by purchasing shares in your limited company as opposed to becoming a partner within a partnership.

Moreover, as the general requirements of running a limited company are more rigorous, there is a difference in perception between a Limited Company and a Sole Trade.

In addition, third parties prefer the limited company structure as there is more information readily available (annual accounts for example) in a format which allows them to understand the business.

Disadvantages


More paperwork

Whereas a sole-trader only has to complete one return per year (income tax self-assessment) a director of a company is responsible for:

  • Annual accounts

  • Annual confirmation statement

  • Corporation tax return

  • In some cases - depending on salary paid - registering the company for PAYE and submitting real time information (RTI) to HMRC each month

  • P11D for any benefits given to a director or employees.

  • Alongside an income tax self assessment for any dividends paid to themselves by the company.

As such, there are significantly higher fees associated with running a Limited Company in comparison to running a sole trade.

More Responsibilities

Directors of companies must comply with Directors' duties which mean that Director's generally have a higher level of responsibility around the way the business is ran.

Less Privacy

Information about directors is available on Companies House including birth date, correspondence address and salaries and dividends paid each year. If this is something which you would not like to be searchable, no such information is published for sole-traders.

Conclusion


Whether deciding to run your business through a limited company or sole trade is not a decision to take lightly and depends on the individual circumstances of your business.


Running a business as a sole trade remains a popular business structure, largely because of its simplicity. If the business itself is not entering into transactions which pose a risk to the owner, it's a business where external investment is not being sought and the profits of the business are around or below the personal allowance level - it can be worth considering whether the additional compliance, complexity and tax and accountancy costs of running your business as a Limited Company is worth it.


As your business grows, it may be that incorporation is an option you consider down the line.


If you do decide to go down the Limited Company route - either because your business is at a stage where incorporation ticks a lot of your business needs - or you are starting as you mean to go on - my suggestion is enlist the skills of an accountant. This will help you navigate the additional requirements a Limited Company brings to the table and keep you on the right side of Companies House and HMRC.



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