Establishing a limited company is one of the popular ways to set up a business in the UK. According to an estimate, there are over 2 million limited companies in the UK. It makes 34% of the UK’s private sector business population. This is because of the huge financial and professional benefits a limited company offers. If you’re wondering how a limited company can be a great option and how jumping from sole tradership to a limited company can be beneficial, read on limited company advantages and disadvantages to know whether you’re making the right decision or not.
What is a Limited Company?
It is an incorporated business structure that needs formal registration to operate. Companies House is responsible to register and administer all limited companies in the UK.
A limited company is a separate legal entity means the assets and finances of the company are separate from its owners. It means there is no risk involved to the personal tax of the company’s owners. Unlike a sole proprietorship, this business structure offers protection to your personal finances and assets.
Limited Company: Advantages and Disadvantages
Before making the decision to establish your business as a limited company, you need to understand the advantages and the drawbacks of running your business as a limited company.
There are a lot of advantages to set up a limited company. These are as follows:
1) Limited Liability
One of the greatest benefits of running your business as a limited company is its limited liability. As there’s always a risk factor in a business. And sometimes, your business might be on the verge of insolvency due to a large debt. So, if your limited company incurs debts, your personal finances and assets are protected. For instance, if your business goes into severe debt, you don’t need to use your personal assets to pay that debt.
2) Separate Legal Entity
On legal grounds, it is a separate legal entity from its owners. This means it has a separate status from its directors and shareholders (owners). It is another great benefit for establishing a business as a limited company than as a sole proprietorship. It allows a limited company to enter into a contract with its own name and can take a loan by using its name. In this way, it has a lot of flexibility with business ownership. In case of bankruptcy, the directors and shareholders of the company would not be declared bankrupt.
3) Professional Status
A limited company has a more professional status than other business structures, especially sole tradership. Your company needs to be registered with Companies House, which means now your business name is a trademark that can’t be reused by someone else. In addition, a limited company is considered more professional and a larger form of business. Due to this, it attracts a large number of investors and clients than other business structures. Banks and other financial bodies can provide loans due to the reliability, security and status of a limited company.
4) Tax Efficiency
The government provides more incentives to limited companies when it comes to taxation on profit and personal income. Now limited companies need to pay 19% Corporation Tax. Earlier in 2015, it was based on the amount of profit your company earns. On the other hand, sole traders also need to pay tax on their income based on the size of profit. It starts from 20% to 45 % based on the profit amount. So, a limited company proves to be tax-efficient than other business structures.
Along with the advantages, there are some of the disadvantages of operating a business as a limited company:
1) Needs Registration at Companies House
A limited company needs to be registered at Companies House. It is a legal requirement to establish a limited company. This process is quite complex and requires time and money to incorporate a limited company with Companies House.
2) Reduced Privacy
Companies House publishes the information of your company on public records. It means that your annual accounts, records and details of shareholders and directors can be viewed by any person. So it reduces the level of your business privacy.
3) Administrative Responsibilities
Compared to other business structures, limited companies have a lot of administrative responsibilities. For instance, managing tax returns, expense details and business accounts can be a daunting and time-consuming task. So, there are a lot of responsibilities that make it challenging to operate a limited company.
Setting up a limited company can be costly than other business structures. Whether you need machinery, equipment raw material or the services of a professional, it needs a substantial amount of money.
Quick Sum Up
So with the above-mentioned limited company advantages and disadvantages, you can now better decide whether you should establish a limited company or not. There are numerous factors to consider. Choosing a business structure depends on your business needs, personal circumstances and future goals. Therefore, you need to spend some time planning for the right business structure that suits your needs. Remember that the advantages of a limited company are more than its disadvantages. So you need to think wisely before making the final decision.
Disclaimer: This blog provides general information on limited company advantages and disadvantages.