Advantages and Disadvantages of a Limited Company

There are equal advantages and disadvantages of a limited company. One of the first common misconceptions with owning a limited company is that people believe it is necessary to register with companies’ house as an Ltd company. Although running your business this way can have many great advantages, it may not be the right option for everyone.

It is important for any aspiring entrepreneur to understand all the options available to them – so we have decided to put together a list of advantages and disadvantages of a limited company.

Advantages of a ltd company

• Ltd company owners are limited in their liabilities if things go wrong. This will depend on the type of legal structure you have chosen and can mean that you are limited by shares or guarantee as well as some other options. As an owner you can only be held personally liable for the amount you have invested.
• The Company may be seen in a more professional light. This often means that potential customers may choose you over a sole trader business as it has been seen historically to be a more professional and established business.
• Some larger clients will only trade with Ltd companies. This could be for many reasons but some of your larger potential clients may have a policy in place which means they will only work with this type of legal structure.
• Depending on the financial circumstance it can be beneficial to set your business up as a Ltd company to make use of the tax and accounting allowances that are put in place by HMRC.
• Ltd company provides more options when setting up your business with you and your families future in mind. There are many options available such as having your children as shareholders or your partner working alongside you as a director. Succession planning is wide and varied subject but is possible with owning a Ltd business.

Disadvantages of a Ltd company

• Your Company Name must follow strict guidelines. More details of this can be found on the Companies House & HMRC websites.
• Moving money in and out of your business must follow strict rules. As a sole trader your profit belongs to you, and you may use it as and when you need. In a Ltd company the profits belong to the Company and its shareholders and any deposits or withdrawals as a Ltd company owner must be in line with accounting rules and processes.
• Legal Obligations. As a Ltd company your legal and financial obligations are much greater.
• A Ltd Company will cost more to run than a single self-employed individual. This is often seen in legal and professional fees as the professional services and advice is key in the running of a successful Ltd business.
• Accounting rules are strict and specific. As a Ltd company you are bound by the rules and guidelines that govern your financial statements. Meaning that some ways of working that you may had adopted as a sole trader may not be allowed in a Ltd company.

For more information on the advantages and disadvantages of a limited company, check out NatWest’s article ‘Setting Up a Limited Company – The Pros and Cons’ 

Are you struggling to decide between a limited company or a sole trader? Do you agree with the list of benefits of being a limited company? Perhaps you have been contemplating the change, and this blog has helped you to decide. Maybe you didn’t realise that there were so many equal advantages and disadvantages of a limited company. We would be interested to know what you think – let us know in the comments below or why not contact us to arrange a chat to get our thoughts on your business