If you’re starting up a business for the first time, you can choose which business structure most suits your needs. A limited company offers liability protection for its directors and is usually most tax efficient route to take. Here we look at the advantages (and disadvantages) offered by incorporating.
Limited company advantages
Here are the main benefits offered by using a limited liability company for your business:
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.
The liability of directors should a company fail is limited to the amount of nominal share capital they invested – often just £1. This is a very attractive benefit offered by the limited company structure. The liability of unincorporated businesses (such as sole traders and partnerships) is unlimited.
You may decide to invest some of your company’s pre-tax income into an executive pension scheme. This is typically more efficient than having to invest funds from post-tax income.
You can extract profits from a limited company in a number of ways. Many director/shareholders draw down most of their income in the form of dividends – which do not attract National Insurance Contributions. In April 2016, dividend tax rates were increased significantly, however the limited route reamins the most tax efficient.
As a director, you have control over when to make a dividend declaration. This offers a tax planning advantage over other forms of business structure. You may decide to postpone drawing down funds until the next tax years starts, for example, to minimise your exposure to higher rates of income tax.
Having a company can present a professional image to clients and customers which is particularly important in certain industries.
It is often easier to secure funding for incorporated rather than self-employed businesses.
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
Your company is a distinct legal entity to that of its owners. This means it is easier to sell than an unincorporated business. It also makes it easier to make succession planning decisions for when you retire, or if you 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.
- Certain proposed company names are restricted by Companies House.
- There are some costs associated with running a company – such as filing fees.
- Information about your company is held on the public record by Companies House.
- 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 each month updating your accounts.
- You will have more official paperwork to deal with than an unincorporated business.
As you can see, many of these ‘disadvantages’ may not even apply to you, and with a good company accountant, you won’t have to personally deal with 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.