There are many advantages of a limited company, including financial security, only being taxed on profits, the ability to claim back costs from running a business from your home etc. Disadvantages are; the cost of setting up a limited company, stricter rules governing the accounts and bookkeeping of limited companies, restrictions on raising capital via sale of shares etc.
No matter what legal business structure you choose, whether it’s a limited company, sole trader or partnership (for example), they all have their own advantages and disadvantages.
Before looking into the advantages and disadvantages of a limited company in more depth, let’s start off by understanding what a limited company actually is.
What is a limited company?
The quick answer is a company who has limited liability. The longer answer is a limited company allows the business owner to keep their own assets and finances separate from the business itself. Also, shareholders (people who have invested in the business) are only responsible for company debts up to the amount they originally invested (and no more). Therefore, it is a great way for business owners to get investment without any risk to their own personal wealth.
What is important to bear in mind is that a limited company is seen as an entity in its own right which therefore can be subject to legal action.
Limited company types
There are 2 different types of limited companies and they are as follows:
- Public Limited Companies (PLC) – these are businesses that have at least 2 shareholders and £50,000 worth of shares being issued.
- Private Limited Companies – Very similar to PLC but the main differences are they can have been established with one member and cannot trade shares to the public to raise capital.
Are you aware of The Companies Act 2006?
When setting up a limited company, there are a few requirements that have been laid out by The Companies Act 2006:
- Requirement 1 – The company must be registered with Companies House.
- Requirement 2 – The company must have at least one director, or 2 if it’s a PLC.
- Requirement 3 – Directors have to be at least 16 years of age.
Managing a limited company
When it comes to managing a limited company, it is usually the case that directors run the business whereas the shareholders fund it and are the ones who are rewarded.
Limited companies are only taxed on profits and VAT has to be charged on services and products when necessary.
It’s time to look into the advantages and disadvantages, starting with the advantages. We should start positively after all!
Advantages and disadvantages of a limited company
Advantages of a limited company
- Financial security – Investors in the company are only liable for debts up to the value of what they invested in the first place.
- Security for employees and other members – Due to the fact that a limited company is deemed to be a separate legal entity, the company will exist beyond the life of it’s members.
- Tax – Limited companies only get taxed on profits which often works out cheaper than tax rates placed on sole traders and partnerships.
- Tax free fuel – Did you know that if you own a limited company, you are better off using your own personal car for business purposes rather than purchasing and running a company car. Doing it this way enables you to charge for the mileage accrued on business travel to the company meaning you can get tax free fuel. Also these costs are often tax deductible to a company, so it’s a win, win situation.
- Claim back for running a business from your house – If you run the business from your house then you can claim back the cost of doing so. Lets say for example you use 1 room for business purposes, work out how much you spend on water, electricity, heating, council tax and rent/mortgage interest then divide the total by the number of rooms you have in your house. This figure is how much you can claim back.
- When you register your limited company, you also have to register the company’s name. Check your chosen business name is free and then register it. The name is protected from the day of registration, the company doesn’t have to start trading on this day, so it’s a good way to secure a good name for the future.
- Employees can be shareholders – Employees can actually purchase shares and therefore become a shareholder of the company. This is a good way to motivate employees that goes far beyond salary rises and bonuses. They too will have a vested interest in seeing the business succeed.
- Credibility and trust – Choosing to have a limited company structure will help with your professional and corporate image. Another thing to consider is the fact that some businesses and agencies will only engage with other incorporated companies.
- Lower Income Tax and NIC – By setting up a limited company, business owners can reduce both their income tax and NIC by being careful with how much salary they take and utilising dividends. By keeping director’s salary below the NIC lower profits limit, you will not have to pay any Income Tax or Class 4 National Insurance on these earnings.
Disadvantages of limited companies
- Cost – there is a registration fee to Companies House when incorporating and there is no way around this as you must register a limited company with Companies House.
- Public record – Business owners are required to share personal and corporate information on public record e.g. directors address.
- Complex accounts – There are more complex and restrictive rules around accounts an bookkeeping for Limited Companies compared with sole traders. For example, companies are required to produce years accounts using a double entry format, balance sheets and other notes. This can be time consuming and costly.
- Raising capital restrictions – There is a restriction on selling shares to raise capital unless you are a PLC.
- Withdrawing money from a business – There are strict procedures involved with taking money out of a business.
- Annual accounts – Annual accounts along with a confirmation statements must be filed with Companies House each year.
- HMRC – HMRC require annual company tax returns and accounts.
- Notifying Companies House – Companies House must be notified whenever changes to the business is made.
- Record-keeping requirements – Limited companies must adhere to strict record keeping requirements such as minute taking at meetings and recording all decision made by directors and shareholders.
That brings us to the end of our blog. When choosing a legal business structure, you have to think what would work best for you. Weigh up the advantages and disadvantages and decide what is the most important.
If you would like to discuss with us further about limited companies, or anything else related to business structures, fill in your details below and one of the team will be in touch.