Should my business be a limited company?

As the title suggests, becoming a limited company limits the owner(s) liability should something go wrong. If a sole trader’s business fails, any debts incurred during the time it traded will still need paying. If the company is limited when it fails, the debt is contained, and swallowed by the business as it sinks. This is because, when registered as a limited company, a business becomes an entity in its own right and not an extension of the owner—there’s a clear separation between the two.

If a limited company, you can chop your business up and sell parts of it (i.e. shares) to friends/family/investors, which is a good way to raise capital to expand/grow the enterprise. These shares will have the same level of liability; if the business fails and is unable to settle the bills of its creditors, the owner will only be required to pay ‘the nominal value of its unpaid shares’.

There are other financial benefits from being a limited company, many related to tax. The main being that limited companies pay corporation tax at 19% whilst a sole trader pays anything from 20% to 45% on their earnings, which profits from their business would form part of. Directors of a limited company can pay themselves dividends as well as a salary; if set at the right amount, they wouldn’t be required to pay tax or NI contributions on these.

Because of the red tape and legalities associated with a limited company, much of which isn’t easy to understand, a lot of new business owners opt to be sole traders—because it’s definitely easier and more straightforward. Maybe due to the hoops that have to be jumped through…being a limited company is seen as superior in comparison. Limited companies are often viewed as being more professional and better structured than small businesses run by one person. Limited companies also appear more credible, should they apply for funding, etc.

As a limited company, the business’s name will be protected. Companies House, the body to which all limited companies must be registered, will only accept unique names. This means, once registered, your business’s name cannot be copied by a competitor.

That’s the good news. However, there’s also the following to take into account when considering whether you should make your business a limited company.

Cons

It can be more expensive to own and run a limited company, compared to one with sole trader status. Professional fees must be paid to Companies House on registering the business, and its accounts must be more robust and detailed, which can result in greater accountancy fees.

All financial and organisational information relating to your business will be made public for all to see—great if you’re doing well, not so good if the business is suffering from a dry spell.

Though there may seem to be a lot of freedoms associated with a limited company, certainly around ownership and tax liabilities, there are quite a few restrictions too: regular reporting and more complicated tax returns, constraints around withdrawing cash from the business, and stipulations over who can actually run the business (bankruptees, disqualified directors and anyone convicted of fraud need not apply).

It’s not a decision that’s set in stone—the status of a company can usually be changed, so if you’re a small trader you can swap to limited company status at any point.

As mentioned, neither company status is right nor wrong. It all depends on what the business does, what the owner(s) wants from it, and the level of time and money they wish to put towards the company’s operation and structure.