What are the pros and cons to becoming a Limited Company?

There are many advantages and drawbacks to consider when debating whether or not to become a Limited Company. In this article we will explore the most common pros and cons to help you make that decision.

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Pros to becoming a Limited Company

1. One of the main reasons Sole Traders opt to become a Limited Company is because of the associated tax benefits.

For example: the Director of a Limited Company would usually take the maximum tax-free income up to their personal allowance of £12,500 as salary. The rest of their income would then be taken in the form of dividends.

The benefit of receiving dividends is that you don’t have to pay a national insurance contribution on them. It is worth noting that limited companies who qualify for the “Small Company Profit” (their taxable profits are below £50,000) would pay corporation tax of 19% on profits BUT this is lower than the 20-45% tax you would pay as income tax as a Sole Trader.

2. Limiting your liability is another reason you might choose to become a Limited Company. This protects your personal assets and finances as your business becomes a separate legal entity, meaning you are not personally liable for any debts that it incurs, as would be the case is you were a Sole Trader.

   
   

3. A more professional look - operating as a Limited Company makes your business appear larger and more professional. And this can genuinely make a difference to how other organisations and customers perceive you. You might even be considered for jobs that may not have come your way as a Sole Trader.

Cons to becoming a Limited Company

1. A more complicated setup – a Sole Trader simply registers with HMRC. Starting as a Limited Company means registering with Companies House and paying a fee to do so. The process can be daunting if you are doing it for the first time, without the help of an accountant.

2. Complex accounts – managing the accounts of a Limited Company brings additional challenges that you won’t face as a Sole Trader. Some of the accounts issues that Limited Companies need to deal with include payroll, bookkeeping, and tax planning – not to mention tax returns, business expenses, and keeping company accounts up to date.

   
   

   Failure to correctly file tax returns can result in fines and other sanctions from HMRC, so it is important to get this right.

3. Issues with ownership – as a Sole Trader you make all the decisions. As a Limited Company, you will have Shareholders. These Shareholders will have a say in how the business is run and this may complicate matters.

4. Less privacy – as your business will be registered with Companies House, you will be sharing information about your company Directors, as well as Shareholders and accounts. These records become publicly available to anyone who wants to access them.

There is a great deal to consider when deciding whether to take the leap to Limited Company. Original Accountancy can help you by going through the pros and cons that are specific to your business.

Get in touch to schedule a meeting to discuss this further. You can do this by scheduling a meeting via Calendly, or by filling out our contact form.