5 disadvantages of a limited company

Chris Andreou

November 25, 2020

disadvantages limited company guide

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Limited Company

Advantage 1 – You pay less tax and National Insurance Contributions

What are the advantages of a private limited company?

In the UK, the majority of self-employed people operate as sole traders. While there are many advantages to being a sole trader, you could take home more money and give your business a professional edge by setting up as a limited company.

In this article, we’ll look at the advantages of operating as a private limited company to see how it could benefit you. If you’re interested in seeing whether a limited company could be a good option for your business, check out our Business Structure guide. If you’re already operating as a sole trader, making the jump to a limited company is more straight forward than you think.

Advantage 1 – You pay less tax and National Insurance Contributions

Who can turn their nose up at the prospect of increased take-home pay? Well, that’s the principle benefit of setting up a limited company and one of the main factors that drive people to switch from a sole trader.

As a director of a limited company, the way you pay tax is different from how you pay as a sole trader. As a sole trader, you’ll pay 20% or more on everything you earn over the tax threshold. As a limited company, you typically pay yourself a small salary so you incur as little personal tax as possible. The majority of your income will come in the form of dividends that are taxed at a much smaller rate, meaning you’re able to maximise your take-home pay.

As well as the tax benefits, paying the majority of your income through dividends means that you’re able to pay less National Insurance Contributions (NICs) as these do not apply to dividend payments. 

Example - Here’s a quick comparison of the difference in take-home pay for a sole trader and a limited company.

  1. Sole Trader
    Revenue: £40,000
    Expenses: £1000
    Tax at 20%: £5,300
    Class 2 NIC: £158.60
    Class 4 NIC: £2,655
    Take-home pay: £30,886.40


  2. Limited Company
    Revenue: £40,000
    Expenses: £1000
    Corporation tax: £5741.04
    Dividend tax at 7.5%: 1,406.92
    Take-home pay: £ 31,852.04
               

As you can see, you save £965.64 as a limited company. What’s not to like?

Advantage 2 – Your liability is limited

While many turn to a limited company for the tax benefits, some would argue that the peace of mind that comes with it is just as important. 

We all know that risk comes with the territory when you run your own business. However, there are ways to minimise your risk as a self-employed person. With a limited company, you’re protected from any debts the company may incur should the unfortunate happen. 

In the eyes of the law, limited companies are their own legal entities, meaning the individuals that make up those companies are not deemed personally responsible from a legal perspective. This means your responsibility for your company’s debt is capped at the number of shares you own in that company.

Example - As a real-world example, imagine you’re running a limited company and you have a share capital of £2000. Now imagine you take out a loan of £5000 but things take a turn for the worse and you’re unable to keep up with payments. If your company continues to defer on the loan payments, your company will be charged with non-payment of the interest on the loan and non-payment to your creditors. In line with the law, your company will be dissolved but you’ll only be liable for the number of shares you hold. In this case, that amounts to £2000.

There are exceptions to this rule, however. If you’ve signed a personal guarantee or if your creditors lose money due to fraud carried out by you (the company director), your liability won’t be capped and you will be personally liable for the debt.

By contrast, sole traders do not enjoy the same protection. If you run into trouble as a sole trader, your liability is essentially uncapped. Taken to the extreme, this could put all your assets at risk, including your house.

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Advantage 3 - Increased credibility

Simply put, a limited company gives you an edge when it comes to credibility and professionalism. In a world where professionalism and first impressions go a long way, a limited company will put you on the right foot.

Why?

Well, limited companies just have a more prestigious business status than sole traders. So much so, that some larger organisations will only work with limited companies or contractors operating through limited companies and will refuse to work with sole traders.

Advantage 4 – Easier funding

If you’re running the kind of business that might look for funding, a limited company makes it easier to secure. This is because a limited company is a separate legal entity, meaning there is less risk to lenders. Sole traders might still be able to access funding, but they would likely receive higher lending rates.

If you don’t want to go down the lending route, you can also self raise funds by selling company shares. This is an option not open to sole traders, who would have to raise any non-lending based funding through personal means.

As a limited company, you could also be eligible for the following venture capital schemes:

  1. Enterprise Investment Scheme (EIS) – A scheme to help you raise funds for your business by granting investors tax relief on shares they buy in your company. To be eligible, you must receive investment within 7 years of your first commercial sale. Eligible investments are capped at £5 million a year.
  2. Seed Enterprise Investment Scheme (SEIS) - A scheme to help you raise funds for your business by granting investors tax relief on shares they buy in your company. This scheme is for companies that have just started or yet to start trading and is capped at £150,000

Advantage 5 – Protecting your name and your brand

Successful businesses tend to be very protective of their brand. There are many reasons for this, but the main one is that if they have a namesake out there doing shoddy work, it could do irreparable damage to their reputation. The legal protection afforded to limited companies helps to avoid this problem. 

Once your company name is registered with Companies House, your name is legally protected, meaning your name can’t be used by another company. This gives you the freedom to craft your brand reputation without fear of someone else ruining all your hard work.

You can use the name availability checker on the Companies House website to see if your preferred company name is available.

Registering a Limited Company Guide

What's Inside:

  • What is a Limited Company
  • 10 step process for setting up a Limited Company
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Registering a Limited Company Guide

What's Inside:

  • What is a Limited Company
  • 10 step process for setting up a Limited Company

Advantage 6 – Easy to transfer ownership

A transfer of ownership is much easier to complete for a limited company than it is for a sole trader.   

In a circumstance where 

  • You want to transfer the ownership of the business by selling your shares
  • Decide to call it a day and cease trading
    or
  • Perish the thought, you pass away

You or your executor will be able to transfer all aspects of the company to someone else with ease. This is because of the share structure of limited companies and how it affects ownership. If you’re a single director limited company, you’ll likely own all the shares. However, some limited companies have several shareholders, which mean different people own parts of the company through their individual shareholding. 

Whether you own all or some of the shares in a limited company, it’s relatively straight forward to change the ownership of those shares to someone else.

Advantage 7 – You can claim a wide range of expenses

As we’ve already seen, one of the biggest advantages of a private limited company is the lower rate of tax and increased take-home pay. One way you can improve your tax efficiency is to make sure you’re claiming for all the expenses you’re entitled to.

As a limited company director, you can claim for things like staff parties, pension contributions, your accountancy fees and much more. For a comprehensive guide on what you can claim for, check out our limited company expenses guide.

Start reaping the benefits of a limited company today

So there you have it, everything you need to know about the advantages of a limited company. If you’re suitably impressed, you can set up your limited company in a few hours and for less than the costs of a takeaway for two. You can do this online through the Companies House online portal.

While the advantages of a limited company vastly outweigh the disadvantages, it does come with increased admin. If you want the benefits of a limited company without the hassle of extra admin, check out our accountancy packages or book a free consultation. We’ll even set up your limited company for free when you sign up.

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