Advantages & Disadvantages of Limited Liability

min read

Advantages

There are several key advantages to forming a limited company. One of the most significant is limited liability protection. This means your personal assets are secure should your business run into financial hardship. This is because a limited company is treated as a separate legal entity to you and other owners. The business is legally classified as an ‘individual’ and can own assets and keep profits after tax. It also means your business’ finances are separate from your own personal finances.

By separating your personal finances and business finances, the business itself is responsible for its liabilities, financial losses and debts. So, should your business go into debt, you and your shareholders wouldn’t be liable and all your personal assets will be protected. We’ll go into more detail on this later, so don’t worry if it’s a lot to take in right now!

Below, we’ll explore the benefits of limited liability, as well as other key advantages of forming a limited company.

Professionalism

Operating as a limited company can hold your business in high regard, particularly for your suppliers or customers. Being a limited company can help you maintain a professional image, and help you establish a level of trust that your customers will be looking for, giving you a competitive edge in your industry. Having ‘limited’ status can also make your business look larger and more established, which can be useful when you’re just starting out.

As a limited company, you’re also required to produce several legal documents and returns annually, such as a set of accounts and your yearly confirmation statement to Companies House. This information is available on Companies House’s database, somewhere your customers or suppliers may look when considering your business, to judge your transparency.

Tax efficiency

Limited companies are much more tax-efficient than sole traders, paying 19-25% Corporation Tax on profits compared to the 20-45% Income Tax paid by sole traders. Setting up a limited company means you’ll be able to take home more of your hard-earned profit and you’ll have greater flexibility for tax planning. You may also choose to take a smaller salary and make the most of your income in dividends, to reduce how much National Insurance you pay. Overall, forming a limited company can allow you to take home more of your earnings.

Protection

There are several forms of protection you’ll receive when forming a limited company. Looking to protect your company image and brand? Once you’re registered with Companies House, your company name is protected and no one else will be allowed to use it. If another business tries to use a name too similar to yours, they will not be allowed to use it.

As mentioned, when forming a limited company you’ll gain the benefits of limited liability. Unlike sole traders, who are personally liable for all business debts and financial losses, as a limited company your personal assets are secure should your company suffer financial loss. Your business is treated separately from those who own and manage it, and your shareholders will be protected too.

Your shareholders will have no legal obligation to pay more than the nominal value of shares they hold, so if you set the nominal value at £1, their liability could be as little as £1, depending on the number of shares they buy. With this in mind, investors are more likely to invest in limited companies because of this limited liability protection.

Disadvantages

There are also some potential disadvantages to forming a limited liability company which are worth noting, including:

Costs

While registering your limited company with Companies House will only cost you £50 (and is completely free when forming your company with SUAZ), there are other costs involved in setting up a limited company. Starting your own business can be a big financial commitment, from the cost of your website to renting an office space.

If you’re looking to cut costs, you may choose to avoid the rental costs and maintenance of an office space. Our virtual office address is a great way to establish a professional image without the expenses of renting an office space. You’ll get a professional mailing address in Manchester so you can keep your personal address confidential, and have an office address to get your business’ name on the map.

Privacy

One of the main disadvantages of forming a limited company is public disclosure. Your accounts must be submitted to Companies House for the public record - this may bother you if you’d prefer your business’ finances to remain private. Every limited company must report on their performance and activities during the financial year. For new companies, your financial year starts on the day your company is incorporated.

Complexity

Limited companies can be considered more complex than other types of businesses, particularly in terms of accounting. As company director, you’ll need to keep accurate monthly records of your tax returns, expenses and other financial documents. Keeping on top of this paperwork can seem taxing, so if you’re looking to alleviate some stress you may want to work with an accountant to make sure things are done the right way.

As you may expect, running a business requires a lot of paperwork and limited companies are no exception. You’ll be expected to keep detailed records of your business and as mentioned, file your accounts to Companies House after the end of the financial year. You’ll also be required to file a confirmation statement with Companies House each year, which tells them the information they hold on your business is still correct. If you’re not prepared for this admin, you may be left feeling overwhelmed. If you want one less thing to worry about, our Company Pro package includes confirmation statement filing - meaning we’ll take care of this for you to save you the hassle.

Limited company or sole trader?

If you’re looking to start your own business, it’s important you get to grips with the differences between forming a limited company and being a sole trader.

Here are the biggest differences to keep in mind:

For sole traders, the business owner and the business is treated as one legal entity, whereas for a limited company, the business is treated as separate from its shareholders and directors. This means that as a sole trader you’re responsible for both your personal and business debts, so if your business struggles financially, you’re personally liable. Whereas, if you form a limited company you’ll gain limited liability so your personal assets are protected should your business face financial struggles.
Another key difference between the two is paperwork and admin. As a sole trader, you face few formalities - you don’t need to register with Companies House or have a director. Instead, all you need to do is let HMRC know you’re self-employed so they know you need to pay tax through Self Assessment. Whereas as a limited company entails more formal responsibilities like registering with Companies House, and keeping on top of record keeping.

Ready to form your limited company?

Starting your own business is a journey like no other. Get ready for financial freedom and the pride and passion that being your own boss can bring.

Let us take some weight off your shoulders with our professional company formation service. We can take care of the complicated stuff so you can focus on the most important thing - your exciting next chapter. Apply to form your company today - you deserve to make your dream a reality.