What advantages does a limited company offer?

If you’re starting a business for the first time, one of your initial tasks is to choose the type of structure under which to trade. This is usually either using a limited company or working as a sole trader.

A limited company offers liability protection for its directors and is usually the most tax-efficient route to take. But it isn’t the right option for everyone.

Here, we examine the advantages (and disadvantages) of incorporating.

Limited company advantages

Here are the main benefits offered by using a limited liability company for your business:

Control

As a director (and usually a shareholder), you have complete control over all aspects of running your company. You can make decisions quickly and efficiently.

Limited liability

The liability of directors in the event of a company’s failure is limited to the amount of nominal share capital they have invested, typically £1. 

This is a key benefit offered by the limited company structure.

In contrast, the liability of unincorporated businesses (such as sole traders and partnerships) is unlimited.

Executive pensions

You may decide to invest some of your company’s pre-tax income into an executive pension scheme.

This is typically more efficient than investing funds from post-tax income, as your company can make tax-deductible contributions to its directors’ pensions, reducing its Corporation Tax liability at the same time.

Tax efficiency

You can extract profits from a limited company in several ways.

Many directors and shareholders draw down most of their income as dividends, which do not attract National Insurance Contributions (like wages do).

In recent years, the 2016 dividend tax hike and the 2023 Corporation Tax rise both reduced the tax efficiency of trading through a limited company; however, it remains the most tax-efficient option for most.

Tax planning

As a director, you have control over when to declare dividends from the company’s retained profits.

This offers a tax planning advantage over other business structures.

For example, you may decide to postpone drawing down funds until the next tax year starts to minimise your exposure to higher income tax rates.

If you own your company with your spouse or partner, you may also benefit from using each other’s tax allowances, rather than owning all of the shares yourself.

Professional image

Having a company can present a professional image to clients and customers, which is particularly important in certain industries.

If you’re a professional contractor or consultant, it will usually be a condition of your contract that you trade under a limited company.

Securing funding

It is often easier to secure funding for incorporated rather than self-employed businesses.

Share classes

Unlike the sole trader route, you can create various types of share classes, which provide different rights for shareholders depending on your needs.

Secure business name

Once your company name has been registered at Companies House, it is legally protected.

Although you can protect trademarks, there is no automatic protection for the identity of sole traderships.

Distinct entity

Your company is a distinct legal entity from its owners.

This means it is easier to sell than an unincorporated business.

It also makes it easier to make succession planning decisions when you retire or die.

Limited company disadvantages

Of course, no type of business structure is perfect. Here are the disadvantages sometimes associated with limited companies:

• You cannot be a director if you are disqualified, an undischarged bankrupt or under 16.
• Some potential company names and terms are restricted by Companies House.
• There are certain additional costs associated with running a company, including filing fees.
• Information about your company is publicly available on the Companies House register. However, you can use a service address to prevent your residential address from being added to the register.
• As a director, you have legal obligations under the Companies Act, including acting in the company’s best interests and avoiding conflicts of interest. Failure to comply can result in penalties.
• You must submit annual accounts to Companies House and HMRC.
• You will typically have to pay more in accountancy fees than a sole trader.
• You will have to spend some time updating your accounts each month.
• You will have more official paperwork to deal with than a sole proprietorship or an unincorporated business.
• You must submit a Confirmation Statement at least once per year to Companies House.
• Companies must maintain statutory registers – even small companies are legally required to keep certain internal records, such as those of shareholders, directors, and persons with significant control (PSCs).

As you can see, many of these ‘disadvantages’ may not even apply to you.

With a good company accountant, you won’t have to personally deal with HMRC and Companies House or worry about completing your accounts.

Limited company vs. sole trader

To view a comprehensive list of the pros and cons of each business structure, read our limited company vs. sole trader comparison table.