If you’re ready to set up your own business, a ‘limited company’ is the second most popular way of doing so in the UK. As of last year, there were around 4.5 million private limited companies, and a further 500,000 are incorporated each year.

As with any business decision, there can be both advantages and disadvantages to running a limited company, just as there are advantages and disadvantages to structures such as sole traders. Understanding the range of benefits that each business structure can offer is incredibly important and will help you determine the right fit for your business.

What is a Limited Company?

There are 4 main types of business structures in the UK and each has various tax and liability implications for owners and shareholders:

–        Sole trader.

–        Partnership.

–        Limited liability partnership.

–        Limited company.

A limited company business structure allows an individual to create a business as a separate entity. The owner and shareholders keep their personal finances separate from their investment, which makes it popular as it offers protection should the business fail.

If the business owed any debts, these would only have to be paid by the business rather than the owner or the shareholders.

What is a Sole Trader?

A sole trader, also known as a sole proprietorship, is a simple business structure in which one individual runs and owns the entire business. They are entitled to keep all of the profits after taxes. However, they are also liable if the business incurs any losses. The sole trader and the owner are seen as one entity in the eyes of the law, meaning they are responsible for any business debts or failures.

Many people refer to ‘one man band’ businesses as ‘sole traders’, as there are no other employees aside from the owner. However, the actual definition of ‘sole trader’ refers to the legal structure of the business, rather than the number of employees.

While a business registered as a sole trader might only consist of the owner, it might also consist of the owner and additional employees.

What are the Advantages of a Limited Company?

Limited Liability & Separate Entity

A limited company offers limited liability to the business owner compared to a sole trader, who would be responsible and liable for all the business. Opting for this business structure allows personal assets and finances to be protected should the business incur debts.

In the eyes of the law, a limited company business is a separate entity to its owner. A limited company director has the protection, should the business fail, whereas a sole trader and its owner are seen as one entity.

As the company is a separate entity, it can enter into contracts and is liable for all the business actions, rather than the director and shareholders. Because of this, the limited company director will have no attachment to the actions of the company from their share.

It is more tax efficient

A limited company can be much more tax efficient compared to a sole trader, which is one of the main reasons why many people set up their business this way. A director will usually receive a salary set at the tax free personal allowance in the tax year, for example £12,570 for the 2022/23 tax year, and then the remainder of their income will be taken through dividends.

Company shareholders can then receive dividend payments from the company, paid from profits after corporation tax has been deducted. There are no National Insurance Contributions to pay on dividends, and they are also taxed at a lower rate of income tax than self-employment income.

On top of this, companies have to pay 19% corporation tax. From April 2023 there is a planned increase in corporation tax rates, with companies that have taxable profits of up to £50,000 staying at 19% and a rate of 25% on profits over £250,000. There will also be a marginal rate applied on profits in between.

At Gorilla, we offer guidance on tax payments and your accountant will work through your tax payments with you. We also have a salary and dividend calculator available on our website. Our salary and dividend tax calculator calculates tax payable on dividends and you can use it to calculate how much tax you’ll pay on the dividends you’ll earn in the current tax year.

A professional status

Setting up as a limited company means the business can be officially registered with Companies House. As a sole trader, the business is not officially registered which does make the process easier, however anyone can use your name for their business and you will have no grounds to take action unless you have it trademarked.

Registering your business with the Companies House means your business name is trademarked and no other business can use it. This can help people find your business easier online, on social media and makes you look more professional.

Limited companies have more prestige when it comes to the business image, making them more trustworthy and appear more professional, meaning you are more likely to attract clients and investors.

It can even be easier for limited company directors to get funding such as loans from banks, as they are seen as a secure business.

You can protect your future

The company can make employer contributions into a pension scheme for the Director and employees which will receive corporation tax relief as it will reduce the company’s taxable profits.

What are the Disadvantages of a Limited Company?

More complicated to set up

A sole trader only has to register with HMRC so it is pretty straightforward. However, a limited company will also have to register with Companies House and pay a fee to do so. You can also form a limited company through a formation company, which also comes at a price.

Accounts can be more complex

Limited company accounts can be complicated compared to other business structures, however if you have a good accountant to take care of this for you, it should never be an issue. Records will need to be kept on a monthly basis to cover tax returns, business expenses and keeping the business accounts up to date.

At Gorilla, you will be assigned your own dedicated accountant who can look after your self-assessments and tax returns for you. When you sign up to Gorilla Accounting, you also get fully inclusive access to FreeAgent at no extra cost.

FreeAgent’s MTD-compatible accounting software allows you to submit MTD VAT returns directly to HMRC.

You can:

–        Upload receipts and manage your expenses through the mobile app on the go as well as other devices.

–        Allow for automated bank feeds to upload your bank transactions daily.

–        Reconcile and categorise your bank transactions in a few easy clicks.

–        Create and send personalised invoices, then set the payment to be automatically chased.

All of this is taken care of on the cloud so that your dedicated accountant can spend more time providing tailored tax advice and a personal service for you. Admin can feel effortless and you’ll be able to make smarter business decisions with insights and accounting reports.

Accountancy Costs

Although it comes as an extra cost to your business, it is strongly advised that you hire an accountant for your limited company in order to deal with your taxes. Your accountant can then file your company tax returns, pay your corporation tax and file VAT returns on your behalf.

As a limited company, if you do any of this incorrectly, you could face paying penalties from HMRC. Luckily, Gorilla Accounting offer full packages for £110, meaning you don’t have to worry about hidden costs or an overpriced service. You can learn more about the packages available at Gorilla Accounting here.

You’re not the only one making decisions

A limited company is likely to have shareholders, and those shareholders have a say in how the business is run, meaning different opinions will need to be considered. The bigger the share that other people have, the less ownership you have yourself, so decisions will not be made just by the director. If you chose to be a sole trader, all business decisions would be made by you.

Public Records are easy to be found

By registering with the Companies House, you must provide information on company accounts, records, directors and shareholders which is then published. This can be accessed by anyone online, meaning clients and competitors can see how your company is doing, reducing the level of business privacy.

Forming a Limited Company

If you are looking to form a limited company, Gorilla can help you by looking after your finances and offering impartial advice throughout the process of setting up your company and beyond. You can learn more about forming a limited company here.

If you’re looking for a new accountant, or want to switch from your current provider, we’d love to hear from you. Join us today by filling in our online form, or calling us on 03301079671.