Did you know that the limited company business structure is the most popular setup for businesses in the UK?
If you’re thinking about taking the next step for your business and becoming a limited company, then read further to check you’re making the right decision. In this article we look at the advantages and disadvantages of a limited company structure.
What is a limited company?
A limited company is a type of company which allows the business owner to keep their own assets and finances separate from the business itself. This means that the business is an entity in its own right.
Compared to other types of business structures, the main difference is that the company’s shareholders are personally protected, so there’s no risk to personal wealth.
It means that the following are true for limited companies versus a sole trader set-up:
- It is legally separate from the people who run it
- It has separate finances from your personal ones
- It can keep any profits it makes after paying tax
What other advantages are there of a limited company?
There are many advantages that come with being a limited company. We take a look at the main advantages in turn below.
Having limited liability means that you have some protection if things go wrong in your business, giving you the financial security for example that your personal income and possessions are kept separate from your business assets.
As a business owner therefore, you won’t face any personal liability as all business activities are undertaken as a director or employee of your limited company. If the company ceases trading or is having cash flow issues for example, it is the limited company who will only be liable for any debt that the company incurs.
One note of caution with regard to limited liability under a limited company structure, for lenders you work with, like banks and suppliers, it is common practice to be asked to sign personal guarantees, and if this does happen, your personal assets are not protected.
Tax advantages of a limited company structured
Limited companies are charged corporation tax at a current rate of 19%. Compare this to a sole trader or individuals in partnerships who may be subject to a higher tax rate, starting at 20% moving up to a maximum of 45%.
As a director of your limited company, you are legally viewed as an employee of the limited company business, so are still subject to income tax on any salary you pay yourself from the business. Read more here on the optimum level of salary and/or dividends to pay yourself without incurring a hefty tax bill.
Not using a company car
As the owner of a limited company, you’ll benefit greatly from using your own personal car rather than a company car for business. This way, you can charge the mileage made on business travel to your limited company. You’ll be able to receive tax free fuel and the costs are actually tax deductible to the company.
Use your home as your office
Save money by using your home as your office to save rental costs on premises.
If you are able to run your limited company from your home, you will be able to claim back for the cost of doing so. All you need to do is know which home expenses are tax deductible and how much you can claim. You can read more here one the allowable expenses working from home.
Protection for your business
As a limited company, once you have successfully registered, your company name is protected by law. Companies House has strict rules for the naming of companies, so no one else can copy your limited company name.
Image is everything
For some businesses, trading as a limited company versus a sole trader can provide a more professional image.
Particularly in the case of doing business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships.
What are the disadvantages of a limited company?
As with most decisions, you should consider the downside and there are few to consider if you think limited company structure is right for you.
Corporation tax bills
Your limited company will be subject to corporation tax, which you would have not experienced as a sole trader and is paid as a tax on the profits of your business.
If you are not aware of the various tax reliefs available to you, if the business is profitable enough, what you save in personal taxes could go to HMRC in the form of high corporation tax payments. We strongly recommend you seek tax advice from a reputable accountancy firm, such as Southside Accountants, who provide accounting for the self-employed. Please contact us to see how we can help.
As a limited company, you are required to publish annual and financial accounts to Companies House which are published in the public domain, via their website. This is in contrast to a sole trader whose business activities are kept privately and there is no obligation to report publicly on your business’ profitability and expenses.
Potential extra costs
If you’ve just started your business the costs of setting up a business can be pricey. Although, the initial costs may prove to be worthwhile when you are eventually established and a successful limited company.
How can Southside help?
As small business advisory accountants in London, we understand how difficult it can be to take full advantage of the benefits of a limited company structure.
Southside Accountants provide accountant services, including tax return services, to small businesses in the UK.
Written by Shaima Todd