There are many aspects to consider when looking at a private limited company's advantages and disadvantages. One of the most notable advantages is that it can help protect your personal assets from business debts and liabilities. A limited entity can also make it easier to raise money from investors. However, there are also some disadvantages to consider. For example, limited companies can be more expensive to set up and run than other business structures, and you may have less control over your business depending on the people involved. Though, you'll have to analyse your business and likely speak to a professional to understand what structure is best for your company.
The Advantages of a Limited Company
There are several advantages to forming a limited company, such as the fact that it is a separate legal entity from its owners, meaning that the owners are not personally liable for the company's debts. This protects the owners' personal assets if the business cannot pay its debts. Limited companies also have a lower tax rate than sole traders and partnerships through efficient tax planning opportunities, making them more advantageous for business owners. Additionally, limited companies often have an easier time raising capital than other business structures, as investors are more likely to invest in a company that offers them limited liability.
1. Limited Liability
One of the main advantages is that the liability of the shareholders is limited to the amount of money they have invested in the company. This means that if the business goes into debt or is sued, the shareholders and directors will not be held personally liable for the debts of the company, and so, all personal assets will be safe. Depending on the industry you are in this could provide to be extremely useful for your business.
2. Tax Efficient
A limited company can be incredibly tax efficient if proper tax planning is carried out. An experienced accountant will often analyse your business's financials and performance to find any tax-saving and growth opportunities. This can be an advantage as it can help to minimize the tax burden on the owners. Additionally, a limited company can claim certain tax deductions and allowances that may not be available to other business structures such as a sole trader.
Whether or not your business would be more efficient operating as a limited entity would depend on a variety of aspects such as the annual turnover. This is something that would need to be discussed with a professional for clarity.
For example, a limited company can set up a pension scheme, which makes any contributions paid through this scheme more tax efficient than through a private pension.
You will also be able to reinvest profit from the business back into the business for further growth rather than withdrawing all of your income. This means that it won't be subject to higher income tax rates and can pay for future operational costs regarding the company's growth; another great advantage.
3. Professional Image
Those who operate a limited company often have more of a professional image when it comes to trading. Whether it's with your suppliers or customers, a limited company usually conveys a certain level of trust that other business structures do not. Many industries' images have been tarnished due to poor reputations and services.
Operating as a limited entity and showcasing that increased level of trust and competence could be just what your customer or supplier is after, giving you the advantage over your competitors. Not to mention making your business look larger than it is, which isn't always a bad thing. A number of suppliers will also only deal with limited companies in specific industries.
A limited company will also have to produce various legal documents and returns on an annual basis, such as a set of accounts. This information is publically available on databases such as Companies House. Whilst this may mean your business is open to more scrutiny, it can also help provide the transparency that clients or suppliers may need. Overall, limited companies are held in much higher regard.
4. Protection of your company name
If you're operating as a sole trader, it is possible that someone can use your business name without any real consequence. This could ruin your hard-earned reputation and eventually destroy your business.
Operating as a limited company gives you the advantage that your business name is officially registered with Companies House meaning that no one else is allowed to use it. If someone tries, they will be notified that it is simply not possible and they must choose something else. This will also occur if the business name they are trying to register is too similar to your own.
5. Claim on limited company expenses
Another advantage of operating your business in a limited company is that the expenses you incur running your business are likely able to be claimed back against your tax liability. You will have the opportunity to claim expenses that you can't as a sole trader or other company structure.
The wider range of expenses you can claim often includes things such as equipment, tools, software, utility bills, and accountancy fees.
6. Pension Opportunities
Limited companies provide the opportunity to enable the use of a pension scheme. This allows you to invest pre-tax income into the company pension scheme as opposed to withdrawing the income and then investing it in a personal pension if you were trading as a sole trader or other structure. This way, you aren't paying business and personal tax before investing your income.
7. Higher Take-Home Pay
When running a business, whether as a sole trader or as an unincorporated freelance operator, your take-home pay will be limited. As a sole trader, you will be paid a set wage from your client and all profits beyond the personal allowance will be subject to tax and national insurance (NIC).
Running a limited company, however, you are able to reduce your National Insurance contributions (NIC) and Income Tax by taking not just a wage, or by withdrawing dividends, but through a combination of both. Keeping your director's salary below the primary threshold of National Insurance will mean that you will not pay any Tax or Class 1 NIC through this salary.
You can then take dividends on top of this salary which is paid from the company's profits. In regards to taking dividends, a director will benefit from the annual given allowance of £2,000, so any dividends below this amount won't be taxed. Above this amount will be subject to dividend tax, which is currently much lower than the rate of Income Tax you would be paying as a sole trader.
The Disadvantages of a Limited Company
There are a few disadvantages of a limited company. One drawback is that a limited company may have to pay more taxes than a sole proprietorship or partnership. Another disadvantage is that you may have to comply with more government regulations. Finally, a limited company may be more expensive to set up and maintain.
1. More Expensive to Set Up
There are a few key disadvantages of setting up a limited company. Firstly, and foremost being that it is more expensive to set up a limited company than it is to set up a sole proprietorship or partnership. This is because there are more legal and accounting fees involved in the setup.
However, the extra expense upfront and in professional fees is often seen as an investment as the many tax-efficient advantages make up for this small loss. Additionally, a good accountant will often pay for themselves with what they bring to the table.
2. More Paperwork
Another disadvantage is that with the operation of a larger and more complicated entity, comes more paperwork and financial documents. Most initial paperwork is regarding the administration and set up of your limited company, however, you will also be required to submit more documents and abide by additional legal obligations throughout the year.
However, this is not something you need to worry about if you have yourself a limited company accountant.
3. Difficult to change the company structure
It is much easier for you to change from a sole trader to a limited company than it is the other way around. With the extra legal obligations and administration involved, it makes changing your company structure a little more difficult. A disadvantage at that, but not something that many business owners usually need to worry about unless it becomes tax efficient for them to change structure.
4. Records Are Publically Available
Whilst this may not be a problem for many, operating as a limited company means that your records and financials will be available to your suppliers, customers, and the general public. A disadvantage to those wanting to keep their business and personal information confidential.
5. Additional Reporting
As a limited company director, you are required to deliver certain documents to both Companies House and HMRC every year. This can include a Confirmation Statement; a simple form that is submitted annually to inform legal bodies of any changes to your limited company such as an address, business name, or directors and shareholders.
You will also be required to submit a Company Tax Return and set of annual accounts. This will inform them of your business's profits or losses in great detail. The biggest disadvantage here is the extra time business owners would need to spend to prepare and file these documents.
These additional reporting requirements are in addition to the responsibilities of a limited company's director. In which the director will need to submit a Self-Assessment Tax Return.
Conclusion
There are many disadvantages and advantages to operating as a limited company, and each one is dependent on the nature of your business. What works for one may not work for another.
Typically speaking, a limited company offers greater tax efficiency, an opportunity for growth, and higher take-home pay, and this is generally the way to go if your business is seeing growth.
In order to bring clarity to the decision, you'll need to speak to a professional so they can analyse your business and its financials to ensure you make the best decision for your future.