Advantages and Disadvantages of a Limited Company

One of the first decisions that you’re likely to make when going self-employed is deciding which way you're going to operate to provide services to your customers.

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.

Firstly, what is a limited company?

Limited companies are a form of business structure where the business is a separate legal entity from its owners. Unlike sole traders, where there's no legal distinction between the individual and the business, a limited company is its own legal entity.

Advantages of a limited company

From credibility to ultimate tax planning efficiencies, let’s take a look at the advantages of a limited company:


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.


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.


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.










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Disadvantages of a limited company

We’ll now drill down into some of the potential drawbacks and so-called disadvantages of a limited company:

1A 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 limited companies and have umbrella options available.
2Accounts 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.
3Typically, 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.

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