To Be Or Not To Be, A Limited Company

limited companyLimited Company or Not Limited Company

One of the most common questions we get asked by new businesses and start-ups is whether they should be a limited company or not.

There are buckets of resources available to help you work out what is best for you, be it sole trader or limited company. If you go and search on-line you will get a myriad of benefits and drawbacks of both structures, so finding out what is really best can be quite difficult.

The thing most of these guides miss is that sometimes you don’t have a choice. If you are a freelancer for example, you may find that certain companies will only employ a limited company, not an individual (read sole trader), so in these cases the decision is already made.

By the same margin, a limited company can convey a message of being ‘serious’ or bigger than your business actually is. Again, the decision to be limited could be driven by factors outside of tax or what is financially best.

Limited Company vs Sole Trader

This is not an exhaustive list but is a decent starting point. I am not an accountant so will leave the tax facts out of things, there is a great video from NJT below, but here we look at the practical differences between limited company and sole trader;

Sole Trader Advantages & Disadvantages

Advantages

  • No set up or registration costs
  • Minimum amount of paperwork & simple accounting requirements
  • Lower accountancy costs
  • Ownership of everything in the business
  • Your details and that of your business are private

Disadvantages

  • Raising capital or funding can be more difficult
  • All liability rests with you
  • Any profit is treated as personal income for tax purposes
  • Any money left in the business is subject to tax in the financial year it was earned
  • Your business can be seen as less professional, smaller or less well run

Limited Company Advantages & Disadvantages

Advantages

  • Better status & can offer more professional credibility
  • Finding finance can be easier
  • Separate existence, the company exists beyond the life of the owners, it could have value after death
  • It can be easier to attract investor funding and grow the business through investment
  • The business can be sold easier

Disadvantages

  • Companies House requires you to keep records, undertake returns and meet obligations
  • If an un-discharged bankrupt you cannot form a company in the UK
  • The company records are all public information, as are the directors details
  • More accountancy costs and greater need for record keeping
  • The company money is not yours, the company and you are separate entities in law

The Tax Benefits

As said previously, Lime Consultancy is not an accountancy firm. To get an idea of the tax differences between limited company and sole trader then catch this great short video from NJT Accountancy;

Limited Company or Sole Trader

Do you chose to be a limited company or sole trader. Short video giving a few differences between limited company and sole trader business structures

The message here is that there is plenty of financial and tax based reasons to either go limited company or sole trader, but there are loads of practical reasons also so just consider everything before making up your mind.

If you have any comments about this post then please add them below, or contact Lime Consultancy direct on 01293 541333.

By Dave Farmer
Google

2 thoughts on “To Be Or Not To Be, A Limited Company

  • Don’t forget the potential legal benefits of having a limited company. A separate legal entity means that the director can be somewhat more protected than if a sole trader.

    • Good comments, thanks Caroline. There are always so many factors to deciding which way to go, which is not to say that the right way now will always be the case. Personal risk is definitely a consideration.

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