Looking to set up a limited company but don’t know where to start?
We explain some of the benefits and costs you should consider before setting up a limited company.
What is a limited company?
A limited company is a type of legal structure for your business. A limited company has a legal identity separate to that of its directors and shareholders.
This is useful for businesses taking on a considerable amount of risk, to prevent being personally liable for business debts that build up when things go wrong.
However, setting up a limited company comes with additional paperwork, responsibilities, and transparency making them time-consuming to run.
Below are some of the benefits and costs associated with a limited company.
Cost of setting up a limited company
- Time – compared to sole traders or partnerships, there’s more legal responsibilities and administration to keep up with. It’s important to work out whether being a limited company is required for the type of business you run.
- Transparency – information about your limited company, including its directors and earnings, is publicly available online through Companies House
- Money – it costs £15 to register your limited company through Companies House and there may be considerable costs for the day-to-day running of your business for example hiring accountants to make accurate records
- Accounting costs and requirements – these are more complex and time-consuming and you may need to appoint an accountant to help you with your tax affairs
- Rigid tax rules – Unlike sole traders, directors of limited companies cannot draw money freely out of the business bank account. When a limited company makes a loss, it can only use that loss against its own profits.
- Legal obligations – As well as safeguarding the company’s assets, directors will have to make important decisions for the company and will be held accountable if they failed to meet any of their responsibilities. Penalties for directors are either a fine or prison.
Benefits of setting up a limited company
- Separate legal identity – this means the company is liable when things go wrong, not you personally. You’ll only lose what you put into the business.
- Professionalism – some businesses might be seen as more professional by others in their industry when they operate as a limited company. It can make it easier to secure suppliers, investment, and eventually sell the business.
- Tax-efficiency and planning – Limited companies in the UK currently pay 19% Corporation Tax on profits, whereas sole traders pay 20-45% Income Tax on their profits. This offers greater flexibility for tax planning.
- Company given more credibility – Operating as a limited company often gives suppliers and customers a sense of confidence in a business and quite often other companies prefer not to deal with non-limited businesses.
- Higher personal remuneration – By setting up a company, you can reduce your Income Tax and National Insurance Contributions by taking a combination of a salary and dividends.
- Investment and lending opportunities – Companies can have multiple owners, so it is possible to raise additional capital by selling shares in the business to new investors.
If you want advice on whether starting a limited company is the best option for you, please do not hesitate to contact our specialist team here at Onyx solicitors on 0121 268 3208 or email us at firstname.lastname@example.org with your query.