Registering as a Limited Company – Pros & Cons
Deciding on the legal structure for your business is one of the most fundamental choices an entrepreneur can face. While operating as a sole trader or partnership offers simplicity, many businesses eventually consider registering as a Limited Company. This move transforms your business into a separate legal entity, distinct from its owners.
But is it the right step for you? Let’s explore the advantages and disadvantages of registering as a Limited Company. 
What is a Limited Company?
A Limited Company is a separate legal entity from its owners (shareholders) and managers (Directors). This means the company can own assets, enter into contracts, and incur debts in its own name. The liability of its shareholders is “limited” to the amount of capital they have invested or guaranteed.
The Advantages of a Limited Company – Pros
Limited Liability Protection: This is arguably the biggest advantage. As a director or shareholder, your personal assets (your home, savings, car) are generally protected if the company incurs debt or faces legal action. Your liability is limited to the amount you’ve invested in the company.
Enhanced Credibility and Professional Image: Operating as a Limited Company often projects a more professional and established image to clients, suppliers, banks, and potential investors. It can open doors to larger contracts and build greater trust.
Tax Efficiency (Potentially): Limited Companies pay Corporation Tax on profits, which can be lower than personal Income Tax rates. Sole traders and partnerships pay income tax at 20% and 40% on profits regardless of how much money they take out of their business. Therefore, if the business is earning a lot of profit but the owners do not necessarily want to take all the cash as income there is a potential saving on tax liability.
When comparing the different tax methods, it is important to consider the corporation tax rate and dividend rate of tax v’s the income tax rate. This requires careful planning with an accountant.
Easier Access to Finance and Investment: Banks and other lenders often perceive limited companies as less risky, making it easier to secure loans or lines of credit. Furthermore, the share structure of a Limited Company makes it much simpler to attract investors in exchange for equity.
Succession Planning and Transferability: A Limited Company is a perpetual entity, meaning it continues to exist even if ownership change. This makes it significantly easier to sell the business, transfer ownership, or pass it down through generations, as shares can be easily transferred.
Brand Protection: Once your company name is registered with Companies House, it’s protected. Preventing anyone else from using the exact same name within the UK.
The Disadvantages of a Limited Company – Cons
Increased Administrative Burden and Complexity: This is the most significant drawback. Limited Companies face more stringent legal and accounting requirements:
Companies House Filings: Annual confirmation statements, annual accounts, changes to directors, shareholders, or registered office must be filed.
HMRC Compliance: Corporation Tax returns, PAYE (if directors take a salary), and potentially VAT returns.
Statutory Records: Maintaining registers of directors, shareholders, and minutes of meetings.
More Complex Accounting: Requires more detailed record-keeping and often necessitates the services of a qualified accountant, adding to costs.
Higher Costs: While formation fees are relatively low, the ongoing costs are generally higher than for a sole trader. This includes professional fees for accountants and potential auditors, as well as software for more complex financial management.
Public Scrutiny: Many details about the company and its directors become public record via Companies House. This includes directors’ names, service addresses, and the company’s annual accounts (though small companies can file abridged accounts). Some individuals may prefer to keep their business affairs more private.
Director Responsibilities and Duties: Directors have statutory legal duties under the Companies Act 2006. Failure to adhere to these duties (e.g., acting in the best interests of the company, exercising reasonable care, skill, and diligence) can, in certain circumstances (like insolvency due to fraud or negligence), lead to personal liability, even with limited liability.
Less Financial Flexibility (Initially): Unlike a sole trader who can simply withdraw profits from their business bank account, money taken from a Limited Company must be done so in a structured manner (e.g., as salary, dividends, or director’s loans). This requires adherence to company law and tax rules.
Reputational Risk if the Company Fails: While personal assets are protected, a company failure is a public event, potentially impacting a director’s professional reputation.
Key Considerations When Deciding
Expected Profit Levels: If your profits are low, the tax advantages of a Limited Company might be outweighed by the increased administrative burden and costs.
Risk Exposure: Is your business in an industry with high financial or legal risk? Limited liability becomes more crucial here.
Growth Ambitions: Do you plan to scale rapidly, attract investment, or eventually sell the business? A Limited Company structure is better suited for these goals.
Administrative Aptitude: Are you comfortable with detailed record-keeping and compliance, or do you prefer simplicity?
Access to Professional Advice: Do you have, or are you willing to invest in, a good accountant and potentially a legal advisor?
Conclusion
Registering as a Limited Company is a significant step that offers considerable advantages, particularly in terms of liability protection and professional perception. However, these benefits come with increased administrative responsibilities, compliance obligations, and costs.
We’re here to help you
Contact us to discuss the best legal structure for your busines – help@hsj.uk.com – 01633 815800 – hsjaccountants.co.uk