The benefits and drawbacks of being a limited company.

When you start in business you’re going to find you’re either a sole trader or a limited company. A sole trader is typically when you’re working by yourself and/or freelancing. A limited company is where you have limited liability and the business itself becomes a legal entity and liable for any debts the company has.

 

However, we’re going to focus on just one of them today and that is being a limited company. If you’re a sole trader you may have been considering making the move towards being a limited company. However, before you make that transition, you’re going to want to know some of the benefits and drawbacks of being a limited company and that’s what we’re going to be looking at today.

 

First, we’re going to start by looking at some of the benefits of being a limited company which include:-

 

  • The business suddenly becomes a lot more tax efficient. As a sole trader, for-profits coming from the business you’d be paying anywhere between 20-40% in tax, whereas if you’re a limited company the amount of tax you’re going to be paying on business profits is reduced to just 19%. And depending on the amount of profit your business is generating this can make a huge difference allowing you to invest more of your profits back into your business than you would’ve before.

 

  • Limited liability. As we’ve touched upon already, as a sole trader, you legally are entirely liable for any debts and damages that the business may occur. This to many is a huge burden and adds to what is an already stressful situation for the business owner. When you make the transition to becoming a limited company, the responsibility then transfers to the business itself. This means that the business, not you individually, is now legally responsible.

 

  • It looks more professional. When you make the move from being a sole trader, you can also change the face of the business so instead of it being linked solely to you as an individual, it now appears with the front of being an established company. This is very important to some clients who prefer to work with companies rather than sole traders. It is also a lot more appealing to customers who believe it shows your company to be more established and legitimate, filling them with confidence.

 

Now we’ve looked at some of the benefits of becoming a limited company, it’s not without its drawbacks which include some of the following:-

 

  • It can be complicated and time-consuming to set up. Making the transition from being a sole trader to becoming a limited company isn’t a simple and quick process. When you’re a sole trader all you simply had to do was register with HMRC, however, to establish yourself as a limited company you have to liaise with Companies House.

 

  • The account situation within your company will quickly start to become a lot more complicated than it was when you were trading as a sole trader. This will lead to you potentially needing to employ the services of an accountant, which we advise as otherwise, you’re going to be spending a lot of your own time on compulsory accounting tasks that need to be carried out monthly and yearly. Accountants also have the expertise to more effectively and productively manage your accounts and make your business as tax efficient as can be.

 

  • Complex ownership – when you make the transition from being a sole trader to a limited company, there’s a high likelihood that the ownership structure is going to change. This also includes bringing in shareholders. This again is no quick process and can involve a lot of legal proceeding and paperwork to be filled in. And not only are profits shared amongst yourself and the other shareholders but decisions also have to run through these shareholders that complicated matters.

 

If you want to know more about limited companies and how they work and whether moving towards becoming a limited company, feel free to get in touch with us and we can run through everything with you in detail and decide whether the time is right for your business to make the move.

 

 

 

 

 

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