What Are the Perks and Downfalls of Registering as a Limited Company?

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This is part 2 of our Soletrader vs Limited Company blogs. We just wanted to share a few of the pros and cons of setting up as a limited company.

What Are the Perks and Downfalls of Registering as a Limited Company?

Picking the right business structure can affect your take-home wage, the tax you pay as well as how visible your earnings and profit are. Here at McCarthy Browne, we are aware of how overwhelming it can be to pick the right one. Did you see our blog post on the perks and downfalls as registering as a sole trader? If not, go have a look here. Below we will explore the advantages and disadvantages of registering as a limited company. 

What is a limited company?

A limited company is a form of business structure in which the company has its own legal identity separate from the owners, shareholders and managing directors. This can even be the case if there is only one person involved in the business. The business will still be a separate legal entity from the person whom is the only shareholder and director. 

A limited company allows the business to enter into contracts and can be sued on its own. This means that the owners or shareholders will not have to sell their own assets to pay the debt if they get sued, unless the directors have been found guilty of unlawful doings or have given personal guarantees. 

When you form a limited company, you act as the director whom is responsible for any legal and financial decisions involving your business. 

There are three boxes to tick before setting up as a limited company; 

  1. That you’re at least 16 years old
  2. That you haven’t been prohibited by a court order from being a company director
  3. That you have no history of bankruptcy 

Once these have been ticked, you need to decide if you want to be a private limited company (LTD) or a public limited company (PLC). What is the difference between the two?

Small businesses, contractors and freelancers usually establish themselves as a Ltd. This is because Plc. need to have at least two shareholders, two directors, a company secretary and a share capital of £50,000. This won’t apply to many small businesses. 

The implications from this form of business structure means that the directors and shareholders can’t take money off of the company whenever they wish to. The money belongs to the company, not the owners. 

When it comes to filing accounts and reporting financial details, the company must fil them alongside a confirmation statement each year with Companies Houses. These can then be viewed publicly. A Corporation Tax Return must also be filed with the HMRC yearly. 

It is really important to keep your income up to date or else your business could face fines and penalties. Keeping your business accounts organised is a great way to avoid mistakes and unexpected costs. A bookkeeper can help you to manage these accounts. 

What are the perks of being a limited company?

By serving your company as a separate director, detached from the company, this means that your business’ assets and liabilities are the company’s and not yours. Therefore, profits and losses belong to the company. However, you must adhere to the Director’s Fiduciary Responsibilities. If you don’t, you may be stripped of your role as company director or face a court order which could end in bankruptcy. Limited liability is a huge advantage. 

As a director, you are entitled to pay yourself via a PAYE salary. This is why you must be registered with the HMRC as an employer. You will also need to fill in a self-assessment form too. You will need to adhere to the HMRC rules on Income Tax and National Insurance contributions according to the different thresholds you may fall under. An advantage of registering as a limited company, is that you will have to pay less personal tax than a sole trader. 

Instead of the above, you could pay yourself a salary up to the annual tax-free personal allowance limit. The remainder of your income can then be dividends, so this is the money left over after all business expenses, liabilities and taxes are paid. All of which the first £2000 are tax free. What happens to the dividends is up to you as company director; you could leave it in your business to help build it up or take your share of the business profits. 

When claiming business expenses, you can choose to pay them straight from your company or pay them personally and claim them back as reimbursed expenses. By claiming allowable expenses as a limited company, you will reduce the amount of profit you will need to pay Corporation Tax on. A bookkeeper can help you and your employees to keep an eye on expenses. Pensions can also be put through as a legitimate business expense. 

You then need to choose your company name- this, unlike a sole trader, has to be 100% unique. You can use the Companies House Web Check service to ensure you have got a unique name. Once you have registered with Companies House, your business name is then protected by law so that no other businesses can register their business under the same name. There is a small registration fee involved and it usually takes roughly around 24 hours. 

Another advantage of being a limited company is that it may have a more professional look. If you want to work with larger companies, they may prefer to deal only with limited companies rather than using sole traders. 

Funding may also be easier to apply for as it is a separate entity from you. 

By having a limited company, you could sell shares to your business. If a shareholder retires, wants to sell their share, or sadly dies, it will be easier to transfer the ownership rather than a business without this registered structure. 

What are the downfalls of being a limited company?

A disadvantage of a limited company is that you must be transparent by law. This information is accessible by anyone. If you fail to make your yearly confirmation statement with detailed information about your business, you could be facing serious consequences. 

You have far more added responsibilities which will be very time consuming. 

What do limited companies have to pay and file?

They have different deadlines set by HMRC and Companies House which must be abided by. 

Once you have registered your business with Companies House, you will be given an accounting reference date. This is the last day of the month when the first-year anniversary of the incorporation of your business falls. For example, you may have incorporated your business on the 12th April, therefore your accounting reference date will be 30th April each year. 

Limited companies need to pay Corporation tax on their profits. You will have nine months and one day to pay this. Whilst you file your Corporation Tax return, you will also have to file a CR600 form to the HMRC once a year. This form will detail your company’s income, minus tax allowances and your business expenses. 

If you are a director of a limited account, you also need to submit P11D forms. This form details the value of all benefits and expenses provided to directors and employees. If you are a limited company, details about your business’ finances need to be accessible for the company in accordance with the Companies Act 2006. For this to happen, you need to submit a yearly set of accounts to Companies House at the end of your accounting date. 

VAT returns are another return that needs to be submitted. This is done at the end of every quarter. Companies need to add up the VAT that they’ve added to sales and deduct the VAT they may have paid on business expenses. On top of that directors of limited companies would still need to submit a self-assessment of their personal income and allowances to HMRC.

If you need more help and guidance on whether you should register as a sole trader or limited company, then please get in touch. 

[email protected]                    www.mccarthybrowne.co.uk                      07595 160911

Kimberley McCarthy

I am a prominent member in a local women’s networking group and am always happy to share my advice and knowledge. I am a strong finance professional with a demonstrated history of working in the financial industry. I have a BA Hons in Accounting and Finance, CeMAP (Certificate in Mortgage Advice and Practice from The London Institute of Finance), CeRer (Certificate of Equity Release) and Financial Accounting, and am QuickBooks certified. Skilled in Negotiation, Business Planning, Customer Service, Certified Mortgage Planning, and Financial Account Management.