If you're thinking of starting your own business you'll know how challenging it can be deciding on the right business structure, with the most common struggle being whether to:
- Form a limited company, or
- Operate as a sole trader
Picking the wrong structure could result in wasted time, money and effort. Things a new business owner doesn't typically have at their disposal.
Choosing to form a limited company provides a number of advantages over the sole trader set up. Here we're going to take a look at these.
Please note, there are a number of different limited company types. The following is for a private company limited by shares.
Advantages | Disadvantages |
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The Advantages of a Private Limited Company
1. Limited Liability
Company finances are very much separate from personal assets. This is because a company operates as a separate legal entity to its directors and shareholders (directors run the company / shareholders own the company). This means that assets, profits and liability, belong to the company.
If the company were to run into trouble, the company director and shareholder are only responsible for the amount of capital they invested.
Comparatively, sole traders have minimal protection as there is little distinction between business finances and personal assets - meaning personal assets such as property are not protected if the business got into debt.
2. Tax Efficient
One of the major limited company advantages over sole traders is tax efficiency. It's perhaps the main reason why people go through the process of setting up a limited company (or switching their structure from sole trader to limited company).
Limited companies pay Corporation Tax on their profits (at a flat rate of 19%) while Sole Trader pay Income Tax (between 20% and 45%) on all taxable earnings. Generally speaking, this gives limited companies a better tax rate.
Additionally, a limited company has a wider range of tax-deductible costs and allowances that it can claim against profits.
3. Prestige and Assurance
The transparency of running your small business as a limited company provides a level assurance to potential investors, partners and customers.
This is because all limited companies must be registered with Companies House - the UK's registrar of companies. Once formed, a company is assigned an official Companies House number and company information (including names, addresses and even financial) is listed on the public register.
Sole traders do not register with Companies House and so aren't as transparent to the outsider.
4. Simple to Set Up, Simple to Run
Setting up a limited company is one of the quickest and easiest business structures to get started with.
The company formations process can be completed online in as little as 3 working hours (our packages start from £12.99), with only the following information required:
- Unique company name
- Registered office address (official address for the company)
- Director information (name, address, nationality, date of birth, occupation)
- Shareholder information (name, address, town of birth, phone number, mother's maiden name)
- Person with significant control information (name, address, nationality, date of birth, occupation, nature of control)
- Share capital
- ID and proof of address documentation for account holders, directors and people with significant control (this can be completed online in just minutes)
5. Brand Protection
No two limited company names can be the same. By incorporating a limited company you are preventing anyone else from taking your business name (fraudulently or coincidentally).
By registering as a sole trader you aren't reserving your company name.
Because of this, it is common for business owners who have no intention of running as a limited company (such as sole traders), to form a dormant (non-trading) company simply to stop anyone else from taking the company name.
The Disadvantages of a Private Limited Company
1. Accounting
Administering company accounts is hard (think corporation tax, tax returns, personal tax) where mistakes can result in costly penalties, being struck off the Companies House register and even legal action. This is why we strongly recommend getting an accountant once your company is up and running.
2. Listing on the Public Register
As mentioned, when you form a limited company, your personal information is listed publicly online at Companies House. This information can include your name, date of birth and the address you register your business at. So if you use your home address to register your business, this address will be publicly listed.
Fortunately there is a way to protect your home address from the public register. With our registered office address service you can use our address as your company's registered office address, therefore shielding your own address from junk mail, unexpected visitors and fraudsters.
3. Post-formation Duties
Annual filing obligations such as the confirmation statement and annual accounts can be off putting to a new business owner. However, company formation agents such as ourselves can assist with the majority of these tasks either through their own software or via the accounting partnerships that they have in place like Mazuma.
It's worth noting that sole traders also have to navigate complex filing duties.
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