Pros And Cons of a Limited Company

pros and cons of limited company

Choosing the right business structure is a crucial decision that can impact the growth and success of your business. In this article, we’ll discover the advantages of operating as a limited company, while considering the potential drawbacks. Read on to gain valuable insights to make informed decisions for your business’s future from day one and beyond.

What is a limited company?

A limited company is a legal business structure that exists as a separate entity from its owners/shareholders. It provides limited liability protection, meaning that the shareholders’ personal assets are never at risk if the company faces financial difficulties. Check out this article from our blog library to learn even more about what a limited company is and what types of limited companies are there – What Is A Limited Company?

And now let’s check the pros and cons of a limited company…

What are the advantages of a limited company?

➡️ Limited Liability – One of the primary advantages of a limited company is the concept of limited liability. Shareholders’ personal assets are protected, and their liability is limited to the amount they have invested in the company. This separation of personal and business assets offers financial security and reduces personal risk.

➡️ Tax Efficiency – Limited companies often benefit from tax advantages. They can claim a wider range of tax-deductible expenses to reduce their corporation tax bill, access certain tax reliefs and allowances, and potentially pay lower overall tax.

➡️ Credibility and Perception – Operating as a limited company can enhance a business’s credibility and perception among customers, suppliers, and partners. It portrays a level of professionalism, stability, and commitment to legal and regulatory compliance.

➡️ Continuity – A limited company has a perpetual existence, separate from its shareholders. It can continue its operations even if the ownership changes, providing stability and longevity to the business.

➡️ Access to Funding – Limited companies have more options to raise capital compared to other business structures. They can issue shares, attract investments, and secure loans or credit facilities more easily due to the perception of limited liability and increased financial transparency.

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What are the disadvantages of a limited company?

➡️ Increased Administrative Burden – Running a limited company involves additional administrative responsibilities. It requires regular filing of annual accounts, maintaining statutory registers, complying with legal and regulatory requirements, and potentially appointing company directors and company secretaries. We always recommend working with a professional accountant to meet your statutory requirements.

➡️ Higher Costs – Setting up and operating a limited company can be costlier than other business structures. There are registration fees, ongoing accounting expenses, and potential costs associated with meeting compliance obligations, such as hiring professionals for tax advice and company secretarial services as running a limited company can be more complex.

➡️ Financial Disclosure – Limited companies must make their financial records publicly available. This level of transparency may be seen as a disadvantage for those who prefer to keep their business finances private, as competitors and the general public can access this information. Don’t worry though, not all the details are publicly available. What is visible and to what extent will be determined by the type of annual accounts that you will submit to Companies House. There are certain rules about this and you can’t choose just how you please, so make sure you talk to an accountant about this to stay compliant.

➡️ More Complex Reporting – Limited companies are subject to stricter reporting requirements. They must prepare and submit annual financial statements, including profit and loss accounts, balance sheets, and directors’ reports. Compliance with accounting standards and regulations adds complexity and may require professional expertise.

➡️ Director Responsibilities and Accountability – Directors of limited companies have legal duties and responsibilities to act in the best interests of the company and its shareholders. They may face personal liability if they breach these duties, leading to potential legal consequences.

A limited company offers a lot of advantages. However, it also comes with increased responsibilities. Before deciding to establish a limited company, it is crucial to weigh these pros and cons, considering the specific needs and goals of your business. Consulting with professionals such as accountants and legal advisors can help you make an informed decision and navigate the complexities associated with this business structure.

It’s so important to collaborate with someone who understands your responsibilities as a limited company, book a call with one of our Oxford-based accountants and get the support and expert advice you need when it comes to a wide range of accounting, bookkeeping, and tax topics and make sure that everything is set up correctly and continues to run smoothly.

Frequently Asked Questions

Limited companies don’t receive tax free allowance. You pay corporation tax on profits you make regardless of how small or how high they are. There are, however, certain ways of reducing your corporation tax bill.

All businesses, regardless of whether their legal structure is a limited company or not, must register for VAT if their taxable turnovers are over a VAT registration threshold. So, if your limited company’s taxable turnover is below this level, you don’t have to be registered for VAT. But you may choose to register for VAT voluntarily. Check with your accountant if it would be beneficial to do so.

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