A limited company has always been a popular business structure, but this may be starting to change. With corporation tax set to rise next year, many business owners are wondering if a limited company is still worth the effort.
This is a simple question, but the answer is less straightforward. It will depend on the nature of your business, and your goals for the future. In this blog, we’ll look at the pros and cons of limited companies so that you can think further about your options.
What is a limited company?
A limited company is a business that functions as a separate legal entity from its owner. There are over four million such firms registered in the UK, with a further 500,000 added each year.
In order for a company to become limited, it must first be incorporated. This is the process of registering a business with Companies House. Once registered, the business will be issued a unique company registration number and become its own “legal person”.
This means that it can enter into contracts, employ staff, retain profits and bear the responsibility for paying debts. A limited company is also obliged to provide regular information to Companies House, all of which can be viewed publicly.
What are the benefits of a limited company?
As you may already understand, the main benefit of a limited company is limited liability. This means that, should your company run into financial trouble, your personal assets will normally be protected.
In the event of insolvency or bankruptcy, the owners or directors of a limited company will only be obliged to pay back the value of their unpaid shares, assuming no fraudulent, criminal or reckless behaviour on their part.
A limited company also pays a lower rate of tax than a sole trader, given the fact that companies are liable for corporation tax, which is currently set at 19% of corporate profits. This means you have more money from tax savings that you can reinvest in the business.
What are the drawbacks?
Lower taxes have always been a major advantage of a limited company, but this may not be the case for much longer.
From April 2023, corporation tax is rising from 19% to 25% for companies that make more than £50,000 a year. This is a major increase, although a sole trader making over £50,270 a year may pay a 40% rate of income tax on a portion of their earnings above this level.
Other possible disadvantages of running a limited company include:
- shareholders having too much control of the business
- the hassle of submitting information to Companies House and filing a corporation tax return
- the lack of privacy that comes from your records being available to the public.
What is the alternative to a limited company?
The main alternative to a limited company is sole trader status. A sole trader is a self-employed business owner who trades under their own name. This means that they are personally liable for any losses, as opposed to the owner of a limited company.
The biggest advantages of being a sole trader are simplicity, independence and privacy. You can start trading immediately without having to register your company, you don’t have to answer to any shareholders and your company records are not made public.
Which is best for me?
Switching to sole trader status is not an action to be taken lightly. You will lose many of the legal protections and tax advantages that you have enjoyed, and your reputation may also take a hit.
You may decide that this is worth it in order to avoid the corporation tax rise, but bear in mind that your tax bill could still be higher as a sole trader.
The final decision is yours, but we would not recommend taking it alone. We have years of experience with tax law, and we’re always happy to offer advice.
Get in touch today to find out more.