What is a limited company?
A limited company is a business structure where the company is separate from its owners (shareholders) and those appointed to run it (directors). But it can also only have one person involved, who will be both a shareholder and a director of the company.
What makes a limited company different from a sole trader is that the financial liability is removed from those running and/or owning the company. Contracts are signed with the company directly and the company is responsible for its own debts.
If the company was struggling to pay off its debts, its directors and shareholders wouldn’t need to sell their own assets to pay off the debt. Instead, the company may have to go into liquidation and a ‘winding-up order’ can be issued by the courts, so that the debts can be paid off. One exception to this is if the directors have been found guilty of wrongdoing in the business, in which case they can be fined.
Limited companies must be registered with Companies House and their details will then appear on the public register. The company must file accounts and a confirmation statement each year, which are available for the public to view. We have a guide on how to file accounts as a limited company here. A Corporation Tax return must also be filed with HMRC every year.
Pros and cons of being a limited company
One of the biggest pros of registering as a limited company is you can separate your business from your personal assets. This reduces your financial liability if the business performance isn’t fantastic.
According to Bytestart, other advantages are:
Raising capital – if you are looking for investment in your business, as a limited company you should be able to sell shares in your business to an investor relatively easily
Tax efficiency – profits can be put back into the business and there is the potential for a lower overall tax rate than other business types, such as sole traders or partnerships
Credibility – some people view limited companies as having a more professional image when compared with sole traders, and prefer to do business with them
Company name – once a company name has been registered with Companies House it cannot be used by another business. Registering as a sole trader doesn’t protect your business name, however you can protect it in other ways, such as registering a website domain name.
There are some disadvantages of a limited company:
Costs – more complex accounting and taxation requirements, which can lead to higher administrative and accountancy costs
Paperwork – there are additional reporting and filing requirements for HMRC and Companies House
Less privacy – company information will be available on public record when filed, including details of directors and financial statements, which would also be available to competitors
Legal responsibilities – if you’re the director of the company, you must pay special attention to managing the company’s assets and making the decision to close the business down if you know the company is unlikely to survive. Otherwise, you could end up facing legal repercussions
Registering as a limited company gives you a range of advantages when setting up a business, but there are also several possible disadvantages you should consider. If you’d like to read more about how registering as a sole trader could also be an option for you, we have a piece just for that here.
