There are a number of advantages to limited company ownership. In fact, for many sole traders, it may be very worthwhile to start working through a limited company. However, some circumstances may mean that going limited’ might not actually be worth it.
What exactly is a limited company?
A limited company is one of the business structures available in the United Kingdom. For sole traders, they and their company are one entity. However, if you decide to set up a limited company, the business will be its own separate entity.
So, is it worth it? The answer is that it totally depends on your situation. Let’s take a look at the advantages and disadvantages limited company ownership brings.
The advantages of limited company ownership
Several benefits come with creating a limited company:
- Limited liability: A sole trader is responsible for their business actions and can be held liable. With a limited company, owners are separate entities from their business and are therefore protected from liability. What this means is if the business incurs debts, all personal assets of the owner are protected.
- Company professional status: A limited company can be a much more professional way of doing business. This may encourage other companies to do more business with you due to increased credibility.
- Potentially increased income: If you operate through a limited company, your take-home pay can be higher than working through some other structures, although contractors also need to consider whether their engagement falls inside or outside the IR35 rules. If you are looking into how to reduce tax liability, then going limited should be a consideration.
- Tax planning and efficiency: A limited company pays corporation tax on its profits, with directors/shareholders then able to draw dividends according to their needs. Working together with your accountant, you will be able to make this process work as tax-efficiently as possible.
- Director pensions: As the director of a limited company, you can choose to invest in a company pension scheme. These pension contributions are made pre-tax, meaning substantial savings for the director in the long run and corporation tax savings for the company.
The tax efficiency of owning a limited company is a great incentive to many. However, the protection that it brings for your personal assets is also a big selling point.
That’s not to say that going limited is always the best way. There may be a disadvantage of private limited company ownership that applies to you.
The disadvantages
Along with the pros, there are also some cons of limited company ownership:
- Limited companies can be complicated to set up. Sole traders register with HMRC and get straight to work. For limited companies, you’ll register with Companies House, pay a setup fee, and then deal with the initial paperwork.
- You’ll be on public records. Registering with Companies House can also lead to decreased privacy for owners. All submissions are open for public viewing, which may be something that some wish to avoid for various reasons.
- More complex accounting: As a director of a limited company, you’ll need to be on the ball when it comes to company finances. Business accounts must be kept well up to date, and you’ll need to cover business expenses and tax returns. If this sounds complicated, it may be worth seeking an accountant to help.
- Potential loss of power: As a sole trader, you are in charge of your business. However, with limited companies there is the potential to take on shareholders who will have a say in how things run. This can be a potential conflict for many owners: Would you rather have a smaller slice of a bigger pie?
For many, the advantages will outweigh the disadvantages. However, it’s important to consider the added responsibilities of limited company ownership.
Is a limited company right for me?
Moving from sole trading to a limited company comes with many consequences, both beneficial and not. The best course of action for many will be to seek advice from a qualified accountant. Contact UWM today for expert advice on your situation.
