Advantages and disadvantages of a limited company
Are you finding Limited Company finances time consuming and a real headache?
Did you know that after ‘sole trader’, ‘limited company’ is the most popular business structure in the UK? There were over three million businesses on Companies House’s register in July 2017.
If you’re thinking about taking the next step for your business and becoming a limited company, then give this a read and check you’re making the right decision.
What is a limited company?
A limited company is a type of company which allows the business owner to keep their own assets and finances separate from the business itself. This means that the business is an entity in its own right.
Compared to other types of company, the main difference is that the company’s shareholders are personally protected, so there’s no risk to personal wealth.
It basically means your business:
- is legally separate from the people who run it
- has separate finances from your personal ones
- can keep any profits it makes after paying tax
What are the advantages of a limited company
There are many advantages that come with being a limited company, these include:
- Limited liability
In the world of business things can go wrong, a huge benefit that comes along with being a limited company is that you’ll receive the financial security which will help you to sleep easy at night.
The business owners won’t face any personal liability as all their acts are undertaken as agents for the company. Shareholders will only be liable for any debt that the company incurs. There are certain circumstances where liability may be imposed by the court, particularly in respect of fraudulent trading.
- Tax benefits
Limited companies are only taxed on their benefits, which is usually at a rate of 19%. They’re also not subject to the higher tax rate of 40% – 50% (unlike sole traders and individuals in partnerships).
The personal allowance level is £11,850. So you are required to earn over this amount before you will pay income tax on it. So, it’s recommended you pay yourself at minimum wage level to feel the benefits.
Income tax rates are:
- 20% on earnings up to £46,350
- 40% on earnings over £46,350 – £150,000
- 45% on earnings over £150,000
So, to really feel the benefit, it’s best to pay yourself in dividends rather than one big paypacket.
Leave your tax to the experts and concentrate on the finer things in life
- Not using a company car
As the owner of a limited company, you’ll benefit greatly from using your own personal car rather than a company car for business. This way, you can charge the mileage made on business travel to the company.
You’ll be able to receive tax free fuel and the costs are actually tax deductible to the company. Doesn’t that sound great?
- Use your home as your office
Save money by using your home as your office rather than spending a fortune renting a premise. Run your business from your house or flat and you can claim back for the cost of doing so. All you need to do is know which home expenses are tax deductible and how much you can claim.
Most business owners only use one room in house for business purposes. It’s pretty easy to figure out which expenses you can claim for. The cost of that room is calculated by working out the overall costs of the house (water, electricity, heating, council tax and rent or mortgage interest (not the mortgage payments themselves) then dividing that number by all the rooms in the house to give you the amount you can claim back.
- Protection for your business
As a limited company, once you have successfully registered, your company name is protected by law. Companies House has strict rules for the naming of companies – so no one else can copy your great name.
For some businesses, trading as a ‘limited company’ can provide a more professional image.
Particularly in the case of doing business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships.
What are the disadvantages of a limited company?
As with most things, there are also a few cons that come with being a limited company. These include:
- Paying corporation tax
Your business will be liable for corporation taxes, which is a tax on the profits of the business. If the business is profitable enough, what you save in personal taxes could go to HMRC in the form of high corporation taxes.
This tax is calculated and paid annually based on your ‘corporation tax accounting period’, which is usually the same as your company’s financial year.
- Administration responsibilities
As a limited company you’ll have a lot of administration things you need to stay on top of. This includes tax returns, expense details and your business accounts. These usually need to be completed every month.
There is a solution to your overwhelming document overload. Hiring an accountant can save you time and money, so you can continue to focus on the core of your business.
- Public accounts
The business must publish its accounts to Companies House, including the details of Corporation Tax and also give a business address. This means that all annual accounts and financial reports will be placed in the public domain.
For sole traders who operating under a business name, you may not wish for this information to be public.
- More costs
If you’ve just started your business the costs of setting up a business name can be pricey. Although, the initial costs may prove to be worthwhile when you are eventually an established and successful limited company.
Working with your current accountant causing you stress?
Affordable Accounting Software and Accountancy in one!
If you’ve ever had an accountant, then you’ll know that they’ll ask you to pick your tech bundle – data collection software, bookkeeping software and then an accountant on top. Up until now, that’s been pretty affordable for most small businesses (even if they have had to do all the…
HMRC’s Self Assessment Helpline Temporarily Closed
In another telephone line announcement from HMRC, they’ve stated that from 12th June 2023 the Self Assessment Helpline will temporarily close for three months. It is current due to be reinstated on 4th September 2023. Whilst the online service portal is open as usual, we, along with a great many…
Self Assessment Threshold Changes for PAYE Earners
In an update from HMRC, they have announced a change in the threshold for PAYE taxpayers to submit a self assessment. From the financial year 23-24, the Self Assessment threshold will rise from £100,000 to £150,000. So what does this really mean? If you were earning above £100,000 pa via…