Advantages and disadvantages of trading through a limited company

Limited Liability

Should the worst happen, and the company owes money, the shareholders are only liable to pay the amount up to their shares. So, for example, if a shareholder has a £1 share, he would only have to pay £1 as his liability is limited to his investment in the company.

Tax Savings

Depending on profit levels, it’s likely that it could be much more tax efficient to trade as a limited company, in comparison to a sole trader. It’s more tax efficient because for income above £40k and above sole traders are taxed at a much higher rate of tax. Companies on the other hand are taxed at a rate of 20% (small companies rate). Where you really start to see the difference is when you start to evaluate how you are going to pay
yourself as a director/shareholder.

Credibility

With limited company status, comes added credibility. A limited company is seen as a much more stable structure than a sole trader, so you’ll start to notice better relationships with suppliers, customers and other stakeholders.

Borrowing Potential

Banks & investors see limited companies in a whole different light than sole traders. This is due to the added security of limited liability and a more stable structure, meaning it’s much more likely to attain investment or raise capital.

Protection of your business name

When you register a limited company, you also register the name. With this registration comes protection that no one else can register a business in that name, whilst you hold it.

Business Continuity

In a sole trader-ship, if the owner dies so does the business. However, in a limited company the business will have continuity as the business will pass on without the owner.

Disadvantages

Complexity

With a limited company comes more rules and regulations to stick too. But, with a great accountant this won’t be a problem for you!

Company information available

Certain information is available to download by anyone from the Companies House registrar. This included the company address, information on when the accounts are due and the previous submitted abbreviated accounts.

Leave a Reply