Advantages and Disadvantages of a Limited Company

Becoming your own boss allows you to choose your way of working and unlock benefits such as tax planning and increased take-home pay. However, before making the leap, there are a few points you must consider. As a limited company director, you will have new responsibilities, such as filing your company’s paperwork.

In this guide, we will explore the advantages and disadvantages of working through a limited company.

If you are ready to set up your limited company, contact us today, and we will assist you with the process.

Advantages of a limited company

1. Higher take-home pay

Working through your own limited company is the most tax-efficient option. If you are outside IR35, your take-home pay will be higher than choosing to work through an umbrella company. This is due to not being subject to PAYE taxes, in the way employees (and those operating inside IR35) are.

On top of this, you may be able to pay yourself more tax-efficiently, too, through a combination of a low salary and dividends to legitimately minimise your personal tax liability.

2. Claim on limited company expenses

Anything solely classed as a business cost can be claimed back on expenses. Trading through a limited company means you can claim a broader range of expenses such as accountancy fees, equipment, software, phones, travel, internet, etc.

Some expenses can offset your overall business profit, reducing the income you pay tax. We’ve covered this in more detail in our guide to expenses, which contains much more information on this topic.

3. The Flat Rate VAT scheme for contractors

The Flat Rate VAT Scheme can generate thousands of pounds of extra profit a year, with most contractors choosing to apply for this scheme.

Effectively, the Flat Rate VAT Scheme allows you to charge VAT at higher rate than you pay to HMRC. You’ll keep the difference, which will vary depending on your industry.

Talk to us today to learn how you can take advantage of the flat rate VAT scheme.

4. Personal assets are protected

As a non-limited business, personal assets can be at risk if the business fails, but this is not true for a limited company.

The ‘limited’ in a limited company refers to liability. This protects your personal assets in the event of debt, losses or legal claims against your company.

As a limited company is legally separate from your personal affairs, in the event of any claims made against your company, you have no personal liability.

This is one of the risks that sole traders run, however. The lack of a legal distinction between a sole trader and their business means the individual becomes personally responsible for any debt the company incurs.

Ultimately, as a limited company shareholder, you cannot be held personally liable for its debts, meaning your personal assets are not at risk.

5. Ease of use

Running your business isn’t as difficult as some make out. An accountant can help free up some of the time spent on your finances and help you manage to manage your accounts.

Working through your own limited company requires a certain level of commitment. Still, typically most clients tell us they spend around 15 to 20 minutes per month managing their company.

If you can comfortably manage a small administrative burden each month, limited company working provides greater flexibility and improved earning opportunities – and tax efficiency opportunities – that other forms of self-employment do not.

6. Company given more credibility

Operating as a limited company can give some suppliers and customers confidence in your business. Sometimes, other companies prefer to avoid dealing with non-limited businesses.

Depending on the sector you operate in, clients may be reluctant to engage non-incorporated businesses, so working through a limited company may offer you a competitive advantage.

And from a liability point of view, clients sometimes expect (or even demand) limited liability protection from the workers they engage.

7. Greater opportunity for tax planning

Working through your own limited company can be financially rewarding, with potentially more opportunities for tax planning.

Tax planning is considered a legitimate way of reducing your personal and business tax liability, and an accountant may be able too help you to achieve greater tax efficiency.

A trusted accountant like Caroola can help you to realise these opportunities. Contact us today and discover how we can help your plan your tax to ensure you maximise your earnings.

8. Protection of your company name

Once your proposed company name is registered as a limited company, the name is protected by law, and no one else is allowed to use it. Waiting to register your company could mean you lose the name you had initially wished to trade under.

9. Investing and lending opportunities

Suppose you’ve had a successful period of trading. In that case, you might consider investing in other businesses or even helping finance another company’s growth, for example.

While this decision shouldn’t be taken lightly, in doing so – and leaving less money left over as profit at the end of the tax year – this could be a legitimate way of reducing the amount of Corporation Tax due.

Disadvantages of a limited company

1. A certain amount of paperwork involved

There are about 15-20 minutes of administrative work required per month. However, you can find an accountant to help you to manage your accounts.

And if paperwork isn’t your forte, at Caroola we offer competitive packages for both sole traders, and limited companies and have umbrella options available.

2. Accounts need to be filed every year

You must file your accounts at Companies House each year, which will be on public record. You must also file accounts, company tax, and Corporation Tax calculations with HMRC annually. If you appoint an accountant, they can help.

Contact us today to find out how we can help you ensure compliance with all your filing obligations.

3. Typically, not ideal for contracts less than £25,000 per year

This is only a general rule. In some circumstances (depending on the contract), it may still be more beneficial to trade through a limited company.

However, there are always exceptions to rules. If you would like more tailored advice on whether a limited company is suitable for your personal circumstances – or whether operating as a sole trader is right for you – we recommend contacting an accountant and asking them for their advice.