Advantages and Disadvantages of Limited Company: A Guide 2024

A limited company is one of the most popular business structures chosen by entrepreneurs due to its separate legal entity status. Here, we look at the key features, benefits, and drawbacks entrepreneurs should consider before choosing this business structure.

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What is a limited company?

This is a business structure that is separate from its owners or directors meaning the company itself is responsible for its liabilities. This provides limited liability protection to directors, owners, and shareholders.

The types of limited companies include;

Public Limited Company (PLC): This type of company is limited by shares. Unlike a private company, it can offer shares to the public.
Private Company Limited by Shares: This is the most popular kind of limited company in the UK. Members of the public cannot buy shares in the business and shareholders’ liability is limited to the amount they have invested in the company.
Private Company Limited by Guarantee: This is usually used by non-profit organisations. Guarantors are responsible for the company’s debts.
Private Unlimited Company: This type of company does not have a limit on the liability of its members. Shareholders are personally liable for the company’s debts and obligations.

What are alternatives to a limited company?

There are several alternatives to setting up a limited company which include:

Sole trader: An individual operates a business without any legal structure and is personally liable for business obligations, and tax returns which must be filed with HM Customs & Revenue. However, there’s no need to pay corporation tax on profits.

The company has no requirement to register its existence or disclose its financial position publicly. The sole proprietor is personally liable for business obligations, and tax returns

Limited Liability Partnership (LLP): This is a hybrid structure that combines a traditional partnership and a limited company. It has a separate legal entity that impacts the liability of the partners meaning, LLP partners/ members have a limited liability protection for debts and obligations of the business.

Unincorporated Partnership: A partnership that involves two or more individuals working together with a common profit objective. It can be formed under a partnership deed or even without a written agreement. Partnerships are less common due to the rise of company incorporations. However, they still offer flexibility.

What are the advantages of operating your business in a limited company?

Limited liability protection

Running your business in a limited company will offer limited liability protection to you as the owner and shareholders. As the owner, your assets are separate from the company’s finances. In case of business debts or legal issues, your assets (such as your home or savings) are generally protected.

As for the shareholders, they have no legal obligations to pay more than the nominal value of the shares they hold meaning that in case of insolvency or the company cannot repay its debt, shareholders will only contribute the amount of their unpaid shares.

Tax benefits

Your business will benefit from tax efficiency. Corporation tax rates are often lower than personal income tax rates. Limited companies pay corporation tax on their profits, however, there is a small profit rate for companies with a profit of £50,000 or less.

To also reduce your overall tax liability, you can manage your income by paying yourself a combination of salary and dividends.

Additionally, you can claim expenses such as salaries, rent, and utilities as tax-deductible. This can result in significant savings for the company.

You can also have the potential for tax planning opportunities such as income splitting and capital gains exemptions. This can help you as a business owner minimise your tax liability and maximise their profits.

Professionalism

Limited companies are perceived as more reputable and stable in the eyes of clients, suppliers, partners, and investors enhancing credibility and the professional level of your business.

It also has the potential to attract higher quality employees to work for the company due to its professional image. This can lead to increased productivity and growth for the business.

Access to government incentives

Operating as a limited company may qualify you for various government incentives such as grants, support programs, and tax relief.

Access to funding

As a limited company, you have better access to funding options from banks, investors, and lenders since they often prefer dealing with incorporated businesses.

Other than loans, you can raise funds by selling a portion of your company, through shares to investors and shareholders.

Easy to transfer ownership

In case of financial difficulties, it is easier to sell the business via shares. You can also easily transfer or hand on the business and bring in investors.

Easy and affordable to set up

UK limited company formation is easy and affordable. For UK and non UK residents, you can register your limited company for as low as £0.99 inclusive of VAT through BusinAssist. With BusinAssist, you will have a quick and easy 2-minute application process and your limited company will be formed within a day.

Company name protection

When you register your company, no other company can use your name, making it unique for your business, unlike a sole trader’s business name.

What are the disadvantages of operating your business in a limited company?

While there are many advantages to operating as a limited company, there are also some disadvantages to consider.

Running a limited company involves more administrative tasks and filing requirements with Companies House such as confirmation statements, and annual accounts which may require hiring professionals. Even if the company is not trading or is dormant, you have to file annual accounts with Companies House and Corporation Tax returns with HMRC.

It may be hard for small businesses with low turnover to operate as a limited company due to costs such as registration fees, tax implications, and ongoing administrative tasks. For very small businesses with low turnover, these costs may outweigh the benefits of limited liability protection.

Having a separate legal entity can be a disadvantage since the company itself can be sued if it fails to repay its debts. Additionally, if you acted as a personal guarantee during the loan application, the bank will get you to pay the outstanding debt. This may limit funding access for your company since many financial entities will not offer a credit facility to a limited company that has a ‘track record’.

Limited companies must adhere to formal legal requirements outlined by the Companies Act. Directors have certain legal responsibilities which may lead to hefty fines in case one doesn’t comply with them.

Company details are available on public record, reducing the privacy of your business. Companies House has an online website where limited company information such as your company’s accounts and its status.

Is it better to operate your business as a limited company or sole trader?

There is no doubt that when forming a company, one of the most crucial decisions to make is choosing a structure that will best suit your business. Choosing either a limited company or sole trader structure has significant implications on tax obligations, administrative requirements, legal responsibility, personal liability, and growth.

Unlike a limited company, a sole trader has no company set up and has absolute control over their business, its assets, and profits after tax. As a sole trader, you are liable for paying your tax and personally responsible for any debts incurred by the business.

This structure is perfect for start-ups and freelancers who have low turnover and few clients. However, when your earnings start to pick up, it becomes more economical to move to a limited company protecting you from tax obligations though you will have certain costs as a limited company that you don’t have as a sole trader.

To make your decision, weigh the pros and cons of each business structure against your specific goals, preferences, needs, your business’ long-term plan, and objectives. Your decision should also be weighed against the time and money required for each structure. For the UK formation of a limited company, we offer quick and affordable rates.

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