As with all things, there are pros and cons. The advantages of setting up a limited company are well documented, but it’s also worth running through the potential downsides so you can make an informed decision.
Initial set up costs for a Ltd company can be higher.
As a sole trader, you don’t have to pay Companies House registration fees to start trading. As a limited company there will be a one off fee to form your company. It currently costs £100 to register directly with Companies House online.
Some companies charge more to set up a limited company; however, the benefit of using a professional includes initial tax planning advice and the registration process. Many companies include VAT registration and setting up your business bank account as standard. Some contractors prefer the reassurance that, for a one-off fee, using a professional minimises any further complications that can be hard to amend with HMRC later down the line.
Be prepared for your company accounts to appear on Companies House records.
Because your company is registered directly with Companies House, you will provide information on company accounts, records, directors, and shareholders. This information is consequently published on the public Companies House register and can be viewed by anyone. As a sole trader, you can keep those records private.
Directors also need to keep Companies House updated with certain information, including changes to directors and people with significant control.
Accountancy fees can vary more for a limited company.
It is undoubtedly true that most accountants will charge more for preparing accounts for a limited company than they would for a sole trader.
However, the disparity between the two is no longer as significant as it used to be; depending on how willing (and relatively confident) you are, you can handle a lot of the admin online with good bookkeeping software.
Accountancy fees are also a tax-deductible company expense, so it’s worth remembering when making your decision, as they can reduce the company’s taxable profit and therefore its Corporation Tax bill. Our complete guide to limited company expenses explains what other costs your company may be able to claim.
A fully inclusive package can be a good choice as your charges won’t vary so you’ll always know where you are. Take a look at our all inclusive accountancy packages here.
Be prepared to do a bit more admin.
To be honest, whether you’re a sole trader or limited company, good records are vital. A limited company edges it in how much time you’ll have to dedicate to paperwork, although not by a great deal.
Whatever your business type we can’t emphasise enough the importance of good, accurate and timely record keeping. It really does come down to whether the time justifies the take-home pay and tax savings you will benefit from being limited.
If you want to compare the numbers, our contractor take home pay calculator can give you an indication of what you may retain through a limited company.
Limited companies also have ongoing filing obligations. These include annual accounts and a confirmation statement, which you must usually file at least once every 12 months. The current online Companies House fee for a confirmation statement is £50.
Depending on your circumstances, you may also need to deal with Making Tax Digital requirements. We have a simple guide to Making Tax Digital if you need an overview of how the rules work.
If you don’t want to be worried every time you need to ask your accountant a question, an all inclusive accountancy package may be better for you – and this will be most beneficial in the early days when there’s a few more things to understand to put good practices in place.
Taking money out of the company can be more complicated.
A limited company is a separate legal entity, so the money in the company bank account does not automatically belong to you personally.
You need to take money out in the correct way, for example through salary, dividends, expenses or, in some circumstances, a director’s loan. This gives company directors useful flexibility, but it also means keeping proper records and making sure each payment is treated correctly.
Our salary vs dividends guide looks at the main ways directors typically take income from their companies, while our dividend guide for limited company directors and contractors explains the dividend rules in more detail.
If you take money from the company that is not salary, a dividend or an expense repayment, it may need to be recorded through your director’s loan account.
You can also read the GOV.UK guidance on taking money out of a limited company.
Company directors have legal responsibilities.
Being a company director also brings formal legal responsibilities that do not apply in quite the same way to a sole trader.
Directors must keep company records, prepare and file annual accounts, deal with the Company Tax Return, and ensure the company pays Corporation Tax where due. You can appoint an accountant to deal with much of this work, but the legal responsibility still rests with the directors.
You can read more about these obligations in the GOV.UK guide to running a limited company.
We hope you have found this article useful. Now you know the potential disadvantages, if they don’t seem as daunting as you thought they might and want to go ahead and set up a limited company, we’ve put together a comprehensive article here – ‘How do I set up my Limited Company’. Alternatively, for further advice, why not speak to our dedicated team of accountants on 0207 096 2659.
