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, get in touch, and we will assist you with the process.
Advantages of a limited company
- Higher take-home pay
Working through your own limited company is often the most tax-efficient option. If you are outside IR35, you can structure your income extraction through a combination of a low salary and dividends to legitimately minimise your personal tax liability.
Conversely, operating inside IR35 or working through an umbrella company, all your income would be treated as salary and taxed accordingly.
A further advantage is that you do not need to extract all the profit in the company and can therefore optimise the use of your personal tax bands.
- 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, proportionally reducing the Corporation Tax your company pays. We’ve covered this in more detail in our guide to expenses, which contains much more information on this topic.
- 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.
- Business 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.
- 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.
- 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.
- 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, and can present complications, it can be an effective method for growing and diversifying your company.
Disadvantages of a limited company
- 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.
- 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 and Corporation Tax returns 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.
- Typically, not ideal for short or low value contracts
The administrative burden of having to close a company correctly can mean that operating as a sole trader or through an umbrella is likely to be a preferred option for one-off, short term contracts. 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.
Explore our packages
To find out more about Caroola and how we can help you with our limited company, sole trader and umbrella options, explore our packages.