When it comes to forming a private limited company, advantages and disadvantages will arise as with any other decision regarding the future of your business.
There are a number of things you should consider when making the decision, such as your future plans for growth and your current profit margins. For example, if you are operating as a sole trader, it may be more money and hassle than it’s worth to register as a private limited company if you are not earning above a certain tax threshold.
If you need to weigh the pros and cons of being a limited company versus a sole trader or working through an umbrella company, working alongside an established formation agent along with an accountant and/or tax adviser can help clarify things and explain any areas of confusion and will enable you to discuss the advantages and disadvantages in order to make the best decision possible with your interests in mind.
There are a number of private limited company advantages, particularly where tax and financial liabilities are concerned.
The business is a separate legal entity, and therefore you are not liable personally for debts as you would be as a sole trader. As you only pay corporation tax on taxable profits at a fixed rate, you are not susceptible to paying higher rates of income tax as you would on your personal income. You are also eligible to claim more respite in terms of tax-deductible costs that can help lower the amount of your corporation tax bill each year.
The ability to raise capital and encourage investment into your business is one of the advantages of a limited company. As your company has a more established profile, investors are more likely to have confidence than when dealing with a sole trader. It is easier to raise money through the sale of shares as well, and as the company is separate from the director, you have the option of selling it for a profit, too.
Finally, alongside the tax efficiency of this structure, one of the key advantages of a private limited company is the mark it makes on clientele and customers. Operating under a LTD status can often improve your credibility and create a more professional impression, which can lead to more business and higher profits in the long run.
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There are some disadvantages of a private limited company of which you should be aware.
There is more paperwork and time associated with running a limited business than when operating as a sole trader, which can be off-putting for some. For example, you will need to set aside time in the early days of the formation to choose a company name, incorporate your business with Companies House, and register to pay corporation tax with HMRC. If you choose to set up a limited company through a formation agent, there may be a cost associated with doing so, but it’s important to note that this relatively small sum can actually save you a great deal of money and hassle in the long run.
You may encounter certain restrictions when selecting a name, as it may already be in use by another company. You can check to see if your desired name is registered through Companies House directly, or through your formation agent. You must also ensure that your registered office address is in the same region of the UK as the region in which the company is incorporated, which for some may mean having to pay for the services of a registered office. The information of this registered address, along with details of the Director, financial history and accounts, and the details of shareholders are also available on public record once a limited company is formed. This can be considered a disadvantage in cases where a company may post a loss or encounter financial difficulties.
The accounting and bookkeeping requirements also increase with the formation of a limited company, especially if you employ people and become responsible for payroll. There are costs associated with hiring an accountant and ensuring this financial administration is properly taken care of. You cannot simply move money out of the business as you please either – you need to adhere to strict practices regarding payment to yourself and to other staff members.
It is worth noting that it is not always possible to register a limited company. Under circumstances where you have been disqualified as the director of a previous limited company or have been declared bankrupt, you may not be able to register your business at all.
If you have questions about the advantages and disadvantages of a private limited company compared with other structures of self-employment, working with an experienced formation company along with an accountant and/or tax adviser can help clarify things and explain any areas of confusion.
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