Pros and Cons of Becoming a Ltd Company

Making your business ‘Ltd’ can be a decision that a lot of people don’t find easy. With changes to tax, legal responsibility and increased admin it can be hard to weigh up whether it’s the right thing to do for you and your business. We understand the trials and tribulations of running a business, here we’ve put together a blog post to make the decision of going ‘Ltd’ easier to make.


  •         People often prefer working with limited companies

As a limited company you’ll likely find that people will have more confidence in working with you as well as contracts being given to you. Limited companies are legally required to publicly publish reports on their accounts which makes it easier for you to be analysed/investigated. Even if you’re a smaller company than a sole trader in the same industry, your limited status means you’ll be more trusted and seen as more authentic to a lot of people.

  •         You might pay less tax

Limited companies don’t have to pay income tax. You’ll pay 19% corporation tax on profits until they exceed £300,000 a year as well as no national insurance. For a lot of companies this makes a huge difference.


  •         Your business name legally belongs to you

Sole traders, unless they’ve registered their companies name, don’t legally own it. If somebody sets up a limited company in your sole trader business name, you could face legal action.


  •         You have more options with your post tax profit

You can either pay the money as dividend and therefore pay personal tax, or you can invest and spend the money. Alternatively, you can keep the money in the company and earn interest through your business bank account. This avoids personal tax.


If by withdrawing the entirety of your profit would result in a higher rate of tax being paid, you can leave surplus income within your profit and loss reserves to withdraw later on. This isn’t an option as a sole trader because your personal and business profits aren’t distinguishable.


  •         Your business and personal finances are kept separate

As the owner of a limited company, you’ll have limited liability protection. This basically means that your personal assets can never be taken to pay any debts of the business. If you’ve given a personal guarantee to a company creditor then your personal assets CAN be used. No business equipment, bills or debts will be linked to your personal finances.


  •         It might be easier to get investment

When you’re a limited company, it’s possible to sell shares to investors. Sole traders can only seek investment when your business is turned into a partnership. Opportunities to borrow money will increase as a limited company and you may also discover securing a company loan without any shareholders is easier.


  •         You may get more tax relief

You can make more tax relief claims towards salaries, pension contributions and other areas as a limited company. This helps towards any businesses growth.


  •         There’s potential to end up with more money

Being paid through a mixture of salary and dividends, then you can possibly reduce your Income Tax and National Insurance Contributions. This works by keeping your salary as a director below the NIC lower profits limit which is £8,424 for 2018/19)


  •         You have less privacy

Your company accounts will be publicised.  So will your office address – however you can use a registered address, for example your accountants address if you work from home.


  •         It can be more complicated

In terms of accounting and tax, it can be more complicated for a limited company. You’re required to file your accounts with Companies House within 9 months of company’s year end. This is what you’ll have to publish:

–          Profit and loss account

–          Balance sheet

–          Director’s report

–          Auditor’s report

–          Notes to the accounts


Smaller businesses aren’t required to submit ALL of these forms. The increase in paperwork, however, will result in higher accountants’ fees.

  •         You might pay more tax

Just as you could pay less tax, there’s also chance you could pay more too.  There’ll be no ability freely draw money from the business account as soon as you become director of a limited company. You have to pay yourself a salary from the company, pay dividends to yourself via self-assessment (at 7.5% up to the higher rate of tax and then 32.5% thereafter) and reimburse yourself for expenses of the business. In 2018/19 tax year there is an allowance of £2,000 dividends which are tax free.


  •         You have more legal responsibilities

Diectors have to safeguard business assets. These can include the decision to cease trade if you think the business isn’t going to survive. Failing these duties is a criminal offence and you will be fined and possibly face a prison sentence.


  •         There’ll be more paperwork

Sole traders are only required to file Self-Assessment tax returns each tax year. Limited companies must file:

–          A set of accounts

–          An annual return

–          A corporation tax return

–          A personal tax return, if you’re the director of the company.


We hope that this helps you in your decision to becoming a limited company. For any further advice, please don’t hesitate to contact us!

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