Advantages and Disadvantages of a Limited Company

Contracting is one of the most exciting career options available. However, there are several advantages and disadvantages of working through a limited company.

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

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

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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.

2. Claim on limited company expenses

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

Our expenses hub contains 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.

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4. Personal assets are protected

As a non-limited business, personal assets can be at risk if the business fails, but this is not the case for a limited company. As the shareholder, you cannot be held personally liable for the debts of a limited company, meaning your personal assets are not at risk.

5. Ease of use

Running your own business isn’t difficult, and an accountant can help manage your finances to free up more of your time. Working through your own limited company does require a certain level of commitment, but typically most contractors tell us they spend around 15 to 20 minutes per month managing their company.

6. Company given more credibility

Operating as a limited company often gives suppliers and customers confidence in your business. Often, other companies prefer not to deal with non-limited businesses.

7. Complete control of your business

You keep complete control of your financial affairs, meaning you do not have to risk your money with any third party administrator or umbrella company.

8. Greater opportunity for tax planning

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

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9. Protection of your company name – even if you are not contracting

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.

Disadvantages of a limited company

1. A certain amount of paperwork involved

There are about 15-20 minutes of administration work required per month, not much more than that of an umbrella company.

2. Accounts need to be filed every year

You have to file your accounts at Companies House each year, which will be on public record. You will also have to file accounts, company tax, and Corporation Tax calculations with HMRC every year. If you appoint an accountant, they will help with all of these.

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3. Costly if contracting for a short period

Running a limited company can be costly if you have a short-term contract then decide to go back to permanent employment, as you will still be required to submit end of year accounts.

Short-term contracts are considered anything less than a couple of months, but it depends on your daily contract amount.

4. 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. We would recommend contacting an accountant and asking them for their advice.

Form your limited company for free

When you sign up for one of our accountancy packages, we will form your limited company for free.