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What Are the Advantages and Disadvantages of Setting Up a Limited Company?

Updated: Apr 18, 2023

A majority of people want to be the boss of their own business. They want to quit their day-to-day jobs and start their own business. The possibility of earning more money as well as the possibility of working in a way that is more flexible are powerful motivators but it's fear of financial loss and the process of paperwork that are making entrepreneurs feel uneasy. However, those with the confidence to make the leap are able to enjoy numerous advantages, particularly when they decide to set up a limited company. Although the sole trader model which is often described as self-employed, is by far the most well-known method to run businesses in the UK, there are many advantages of setting up a limited company in the UK.


What is the Main Purpose of a Limited Company?

"What is the main purpose of a limited company?" is a question asking about the primary objective of a business entity known as a limited company. Limited companies are formed with the intention of limiting the liability of the business owners (also known as shareholders) to only the amount of capital they have invested in the company.


The purpose of this is to protect the personal assets of the shareholders in case the company faces financial difficulties or legal issues. In addition, limited companies enjoy certain tax benefits and can often access funding more easily than other types of businesses. Ultimately, the main purpose of a limited company is to create a separate legal entity that can conduct business and manage its own affairs, while minimizing the personal risk and financial exposure of its shareholders.


What are the Main Differences Between a Limited Company and A Regulars Business Firm?


This question refers to distinguishing characteristics between two types of business entities. A limited company, as we discussed earlier, is a business that is formed with the intention of limiting the liability of its owners (shareholders) to the amount of capital they have invested in the company. This means that the shareholders are not personally liable for any debts or legal issues that the company may face.


On the other hand, a regular business firm typically refers to a sole proprietorship or a partnership, where the owners (proprietors or partners) are personally liable for any debts or legal issues that the business may face. This means that the personal assets of the owners may be at risk if the business incurs significant debts or faces legal action.


Another key difference between a limited company and a regular business firm is in their legal structures. Limited companies are separate legal entities, meaning that they can enter into contracts, sue and be sued, and own property in their own name. Regular business firms, on the other hand, do not have a separate legal existence from their owners. This means that the business and the owners are treated as one and the same in the eyes of the law.


Lastly, there are also differences in taxation and ownership structures between limited companies and regular business firms. Limited companies are subject to corporation tax on their profits, whereas regular business firms are typically taxed on the personal income of their owners. Additionally, limited companies can have multiple shareholders who own different percentages of the company, while regular business firms are typically owned by one or more individuals who have equal ownership stakes in the business.



Here, we highlight 9 of the biggest benefits a limited company gives you over working as self-employed.


Benefits of Setting Up a Limited Company


1) Limited Liability

This is among the primary advantages of opting for a limited company. As we've mentioned earlier, limited companies are independent legal entities. This means that you're not personally responsible for debts in the event that something should occur. Your only responsibility is what the owners of the company bought at the time of the company's creation. If you are a sole trader both you and your business will be considered to be a single entity for administration and tax purposes.


2) Distinct Entity

Limited companies are distinct entities from their shareholders. All of the company's activities, from the company's bank account to the ownership of assets, and participation in tenders and contracts are solely for the company's benefit and is separate from the interest of shareholders. A sole trader's business is considered to be an individual entity for administrative and tax purposes.


This means that the company can enter into contracts, own property, sue and be sued, and conduct business in its own name. This provides flexibility and autonomy to the company and allows it to operate independently from its shareholders. This can be particularly useful if the company wants to expand or take on new business opportunities.


3) Low Set Up Costs

Another reason that people opt to establish a limited company rather than trying sole trading is that it's relatively inexpensive to get the company operating. For just £12 you can gain access to many benefits, such as tax advantages that you would not enjoy when using any other business arrangement. Additionally, however, the process is straightforward. There are no complicated prerequisites to becoming a director, which means that anyone can apply.


4) Professional Image

A limited company also has the advantage of a more professional image. Limited companies are often viewed as more established and credible than other business structures. This can be particularly important when dealing with customers, suppliers, and other stakeholders. A limited company can also enhance its professional image by having a registered office address, which can be different from its trading address. This can give the company a more prestigious location and can enhance its reputation.


In certain industries and businesses, having a limited company can provide a more professional image. If you're doing business with larger corporations it is possible that they prefer dealing only with limited businesses instead of sole traders or partnerships.


5) Tax Efficiency

Limited companies are also tax-efficient, particularly when compared with sole trading. This is the primary reason they're so well-known. Business owners are always looking for ways to lower the amount of taxes they pay. Directors of limited companies can earn small amounts of money and get the bulk of their earnings through dividends. This means you can reduce the amount you have to pay for National Insurance contributions. Companies must pay 19% corporation tax on profits, while sole traders are required to cover between 20% and 45% tax on their earnings. Establishing a limited company is a way for you to keep more of your profits.


6) Easy to Transfer the Business to Someone Else

If you're not keen on running the business it could be transferred to another person. If you've made the decision to sell or occurred that prevented the owner from taking part in the business (such as a death or accident) It's much simpler to transfer a business. The company is the owner of the entirety of its assets including physical assets to money and equipment which is why transferring the ownership of everything to a different person is simple.


7) Shareholders

A limited company is able to issue different types of shares. This means that you can transfer stakes to the firm and transfer shares into your own name. If your company is limited and has more than one shareholder, it is recommended to sign a shareholders agreement that defines your obligations and responsibilities. It is also a good idea to define what shareholders are allowed and should not perform with the shares they own. This is extremely helpful in the event that a shareholder wants to leave the company.


8) Your Business Name is Protected

If you form a company and offer your name with a degree of security it isn't possible to enjoy being a sole trader. Names are registered with Companies House so, if you want to operate under a particular name, incorporating an LLC will guarantee that nobody else is able to make use of the name. If they do or choose the same name as yours, you are able to file an objection. The other business will need to modify its company name. If you are a sole trader the name you use for your business could have been registered by a different company.


You might think it's not a problem. However, the truth is that it can be detrimental to your company. If there's a business that has the exact same name as your company, it is possible for people to confuse both of you. In the event that they do not have a great reputation, then your only trade name could become a result of their name, which could harm your reputation. Also, you have to choose a distinct company name to make sure you're not choosing an existing name that is too identical to that of a company that already exists.


9) You Can Set Up a Dormant Company

If you've already got the most suitable name for your company however you're not quite in a position to launch your business then you could set up an inactive company. This means that your business doesn't have significant accounting transactions occurring during your tax year. This way you're securing your name for the future, and giving yourself the opportunity to raise money to expand the company.


10. Perpetual Existence

A limited company also has the advantage of perpetual existence. Unlike other business structures, a limited company does not cease to exist if one of its shareholders dies or leaves the company. The company will continue to exist and operate, regardless of any changes in ownership. This provides stability and continuity to the company and ensures that it can continue to operate even if there are changes in ownership or management.


11. Access to Funding

A limited company also has the advantage of easier access to funding. Due to the limited liability protection offered by a limited company, lenders and investors are more willing to invest in the company. This is because they know that their investment is protected, and they are not personally liable for any debts or legal issues that the company may face. In addition, limited companies can issue shares to raise capital, which can be particularly useful if the company wants to raise funds quickly or if it wants to avoid taking on debt.


Conclusion

In conclusion, there are many advantages to setting up a limited company. Limited liability protection, separate legal entity status, perpetual existence, easier access to funding, tax benefits, and a more professional image are just some of the benefits that a limited company offers. These advantages can make a limited company an attractive option for entrepreneurs and business owners who want to protect their personal assets, maintain flexibility and autonomy, and access funding and tax benefits. Overall, a limited company can provide a solid foundation for a successful and profitable business.


What are the Disadvantages of a Limited Company?

While there are many advantages to setting up a limited company, it is important to consider the potential disadvantages as well. In this essay, we will explore some of the key disadvantages of a limited company.


1. Increased Administrative Burden

One of the main disadvantages of a limited company is the increased administrative burden that comes with this type of business structure. Limited companies are subject to more regulations and reporting requirements than other business structures. For example, they are required to file annual financial statements with Companies House, maintain accurate records of their shareholders, directors, and officers, and comply with various tax and employment laws. This can be time-consuming and expensive, especially for small businesses that may not have the resources to hire additional staff or outside professionals to assist with these tasks.


2. Greater Personal Liability for Directors

While limited liability protection is a significant advantage of a limited company, directors of the company may still be personally liable for certain actions or decisions. For example, directors may be held liable for breaches of health and safety regulations, environmental regulations, or employment laws. Directors can also be held personally liable if they act in a fraudulent or negligent manner, or if they allow the company to trade while insolvent. This can be a significant risk for directors, who may be personally liable for any fines, damages, or legal costs that arise from these situations.


3. Higher Taxation

While there are some tax benefits associated with a limited company, there are also some potential drawbacks. For example, limited companies are subject to corporation tax on their profits, which is currently 19% in the UK. This is generally lower than the income tax rates that individuals are subject to, but it can still be a significant expense for the company. In addition, limited companies are not eligible for certain tax deductions or allowances that are available to sole traders or partnerships. This can result in higher overall tax bills for the company.


4. Less Privacy

Another disadvantage of a limited company is that it offers less privacy than other business structures. Limited companies are required to file various documents with Companies House, including annual financial statements and details of their shareholders, directors, and officers. This information is available to the public and can be accessed by anyone who wishes to view it. This can be a concern for business owners who value their privacy or who do not want their personal information to be publicly available.


5. Higher Set-up and Running Costs

Setting up a limited company can also be more expensive than other business structures. There are various costs associated with incorporating a company, such as registering with Companies House, appointing directors, and issuing shares. In addition, there are ongoing costs associated with running a limited company, such as paying for accountancy and legal services, filing annual returns, and maintaining accurate records. These costs can add up quickly, especially for small businesses that may be operating on a tight budget.


Conclusion

In conclusion, while there are many advantages to setting up a limited company, there are also several potential disadvantages that should be taken into consideration. These include the increased administrative burden, greater personal liability for directors, higher taxation, less privacy, and higher set-up and running costs. It is important for business owners to carefully weigh these factors when deciding whether a limited company is the right choice for their business. Ultimately, the decision will depend on a variety of factors, including the size and nature of the business, the goals of the business owners, and the regulatory and tax environment in which the business operates.


However, as you may already have noticed that the advantages of setting up a limited company outweigh the disadvantages. So if your business model allows, you should go for a limited company.



Why You Should Choose Pro Tax Accountant for Setting Up a Limited Company in the UK

Why You Should Choose Pro Tax Accountant for Setting Up a Limited Company in the UK


Are you planning to set up a limited company in the UK? If so, you're making a smart move. Limited companies offer numerous advantages, such as limited liability, better tax efficiency, and a professional image. However, setting up a company can be complex, and it's crucial to get it right from the start. That's where Pro Tax Accountant comes in. This professional accounting firm based in the UK offers comprehensive services to help you navigate the process with ease. Here are the top reasons why you should choose Pro Tax Accountant for setting up your limited company.


Expertise and Experience

Pro Tax Accountant boasts a team of qualified and experienced accountants, who have a deep understanding of UK company formation laws and regulations. They keep themselves updated with the latest changes in the industry and use their wealth of knowledge to guide you through the process, avoiding common pitfalls and ensuring a smooth setup.


Tailored Solutions

Every business is unique, and Pro Tax Accountant understands that. They offer bespoke solutions to cater to your specific needs and goals. From selecting the right company structure to advising on share allocations and director responsibilities, they provide tailored advice that suits your unique circumstances.


Time and Cost Efficiency

Setting up a limited company can be time-consuming, particularly if you're not familiar with the process. Pro Tax Accountant's streamlined approach saves you valuable time and resources. They handle the entire process on your behalf, from company registration to setting up your tax accounts, allowing you to focus on your core business activities.


Compliance and Peace of Mind

With ever-changing regulations, ensuring your limited company remains compliant can be challenging. Pro Tax Accountant takes this burden off your shoulders by managing all aspects of compliance, including submitting annual accounts, handling VAT returns, and managing payroll. Their proactive approach gives you peace of mind, knowing that your company is in safe hands.


Ongoing Support

Pro Tax Accountant doesn't just help with the initial setup; they also offer ongoing support and advice as your company grows. They can assist with tax planning, cash flow management, and business growth strategies, ensuring your company remains on a strong footing in the long term.


Transparent Pricing

Pro Tax Accountant is committed to providing high-quality services at a fair and transparent price. They offer a range of fixed-fee packages, ensuring you know exactly what you're paying for with no hidden surprises.


Conclusion

Setting up a limited company in the UK is a crucial step in your business journey. By choosing Pro Tax Accountant, you'll gain access to expert advice, tailored solutions, and ongoing support, ensuring your company is set up for success. Don't leave your business's future to chance—contact Pro Tax Accountant today and let them guide you through the process with ease. Your business options are never limited when you choose "PTA". Get in touch with us today.







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