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Is it Worth Setting Up a Limited Company?

Wondering whether it’s worth setting up a Limited Company? Or have you heard in a Facebook group that this is the only way to run a business, especially if you want to protect yourself? Then this guide is for you! Here, you’ll find out the advantages and disadvantages of being set up as a Limited Company to help you decide whether forming one is suitable for setting up your new business. There’s also some helpful advice for you to consider when it comes to the tax benefits and protection of your assets. Rest assured, once you get to the end of this guide you’ll be breathing a sigh of relief. Or, at least know where to go to continue your research into business structures.

Friendly Disclaimer: Whilst I am an accountant, I’m not your accountant. The information in this article is legally correct but it is for guidance and information purposes only. Everyone’s situation is different and unique so you’ll need to use your own best judgement when applying the advice that I give to your situation. If you are unsure or have a question be sure to contact a qualified professional because mistakes can result in penalties.

1. What is a Limited Company?

A Limited Company is a type of UK business structure used by some to run their businesses through. It is its own separate business entity responsible for its own liabilities, contracts, money etc. Think of it like a completely different person from yourself, responsible for taking care of all your business responsibilities. This includes having its own separate bank account to spend/receive money, owning all your business contracts and with its own specialist tax/accounting rules to follow.

In order to run the business, a Limited Company has directors who are named individuals responsible for running the company. It’s these Directors whose duty it is to run the business successfully, follow the rules of the Limited Company (set out in the Company rulebook called the Articles of Association) and ensure all filing deadlines are adhered to.

2. Do you need a Limited Company to Run a Business?

No, there is no legal requirement to have a Limited Company to run a business. The quickest and easiest way to get started is to register as self-employed. In fact, many people choose to get started as a sole trader and then incorporate when the time is right. Despite the ease of going self-employed, there are certain legal protection and tax benefits that a Limited Company can bring. Additionally, it formalising ownership between you and your business partner(s).

3. What Alternatives are there to a Limited Company?

There are 4 common types of UK business structures, each one bringing different benefits, reporting requirements and tax rules. There are:

  1. Self-employed (or sole trader)
  2. Private Limited Company
  3. Partnership
  4. Limited Liability Partnership

You can find out more about each of these business structures in this guide.

4. Advantages of a Limited Company

Here are the main advantages of setting up a Limited Company:

+You are not personally responsible for the business liabilities. This is because all the bills and agreements are in the name of your Limited Company;
Better credibility with lenders such as banks;
Some customers may prefer to do business with a Limited Company, depending on the business you’re in;
Depending on your business profits, forming a Limited Company can save tax.

5. Disadvantages of a Limited Company

And now for the main disadvantages of forming a Limited Company:

 More reporting requirements with both HMRC and Companies House;
 A simplified version of your Annual Accounts is publicly available at Companies House each year;
 More complicated to administer and to run tax effectively, meaning you may need to pay for an accountant;
 Company Directors should probably register for self-assessment and submit a tax return each year;
– Even though a Limited Company is responsible for its own debts, funding options like loans and overdrafts often require directors guarantees. This makes them personally liable for these particular debts.

6. Does a Limited Company Protect Your Personal Assets?

A limited company is a separate legal entity from its Directors and Shareholders. This means it is responsible for its own debts such as taxes, purchase invoices and loans. However, the reality is that the veil that a Limited Company offers is beginning to disappear in certain circumstances such as:

  • Banks & lenders are more commonly requesting personal guarantees of loans and overdrafts making you ultimately responsible for paying back debts regardless of Limited Company status
  • If you were considered to be doing anything wrongful or fraudulent by HMRC or Companies House as Director of a Limited Company, it’ll become your responsibility to repay and rectify any issues;
  • If as a Director you were deemed to have taken out too much money either by loans or dividend from your Limited Company, you’d be required to repay the money again putting your personal assets at risk;
  • Or, if you were trying to wind up your business without paying taxes. It’s worth knowing that HMRC has the power to prevent you from shutting down your Limited Company until you pay the unpaid amounts.

7. Is it Worth Setting Up a Limited Company?

Deciding on whether it is worth setting up a Limited Company, comes down to your own personal circumstances. The first major thing to consider is the tax benefits. Generally, accountants do not recommend forming a Limited Company until your business profits reach £50,000. This is because there are no real tax savings to offset their fees under this threshold.

Owning a Limited Company has more reporting requirements. Therefore, I would always recommend you hire an accountant but this brings cost, along with subscription fees for accounting software like Xero. An accountant will help you manage your returns, avoid penalties and calculate the most tax-efficient way for you to pay yourself. And, with all the extra reporting, some business owners, despite the tax savings, prefer the simplicity of staying as a sole trader.

This guide about Sole Trader or Limited Company contains access to a free tax calculator to help you work out which business structure will help you to pay less tax.

Many business owners and side hustlers choose to start out as self-employed and then incorporate once the time is right. Going from self-employed to an Ltd is more straightforward than forming a Limited Company by mistake and trying to go back to being a sole trader.

What to do next?

As part of future-proofing your business, check the name you want is available at Companies House, just like you would a domain. If it is available, then you can form your Limited Company and keep it as a dormant company. If you do this, you’ll only need to deal with very minimal filing requirements. You can handle yourself with this guide, but have your LTD name ready for when you need it.

Don’t forget that if you plan to operate through a Limited Company, then you’ll need to register your Ltd before, or as soon as you begin trading. You’ll need to send out sales invoices, open a business bank account and take out insurance and permits in the name of your Ltd. In some cases, you might need to provide the Companies House registration number of your business to complete applications.