Here are 3 advantages of a limited company and 3 disadvantages when compared to self employment.
Advantage no. 1 – Protection from bankruptcy
If you become a limited company and your business goes bust, it is the company that goes bankrupt not yourself. This means that you can lose your business but not lose your house – very important! The reason this is possible is that in law, a ‘limited company’ means that all the business financial transactions are held in the limited company and are separate to the business owner. This is where the word ‘limited’ comes from. You are ‘limited’ in your liability.The only way this doesn’t happen is if you have given someone control over your personal assets i.e. you have raised money for your business from the bank but the bank has asked for a ‘personal guarantee’ i.e. something that overrides the limited company. In this way, if the business goes bankrupt, the bank come after you.
Advantage no.2 – Commercial credibility
For some business owners, it will be important to appear bigger than they are. Being a limited company helps this (as does becoming VAT registered). This isn’t always a vanity thing. In some industries, it is impossible to trade if you are not a limited company. For example, local councils tend not to want to deal with self-employed individuals.It is worth finding out whether becoming or not becoming a limited company actually matters to customers. For some, it will absolutely matter. Although, I would say, that nobody has ever asked me whether I am a limited company or not (I am!), they are not bothered.The reason why some customers want a limited company is that a limited company appears more official and legal than merely self-employment.
Advantage no. 3 – You save tax as a limited company
This is the best advantage and applies to every business of profits of over £30,000. This is the current tax saving between a limited company and self employment.
- Tax saving
You will need an accountant to make sure you get these tax savings (see disadvantages below) but there is a big tax saving for anybody thinking of becoming a limited company.It all sounds good, but before you set up a limited company see below for the three disadvantages….
Disadvantage no. 1 – Accountancy fees are higher
This is because there is three times the level of work needed to run a limited company. Although on the numbers below, at the profit level of £30,000 and above, your tax savings will more than cover this.Also, as a limited company, you will need an accountant. Some self-employed individuals successfully compete their tax returns themselves. As a limited company, you will need to get an accountant since the limited company accounts are far more complicated than a tax return.Here is a run down of what an accountant will do for you if you are a self employed individual or a limited company.
- Personal Tax return
- Simple accounts (optional)
- Limited company
- Personal tax return
- Director’s payroll
- Full statutory limited company accounts for HM Revenue & Customs
- Abbreviated statutory limited company accounts for Companies House
- Corporation tax return
- Annual return
- Dividend vouchers
Disadvantage no. 2 – There is more to do and think about as a limited company
As you can see above, there is more going on with running a limited company and whilst an accountant will do most of it for you, there are more things to be aware of and learn. The relationship with your accountant is likely to be more involved and communication more regular as well.If you are starting a business then self-employment is often the most straight-forward option since it is the easiest to set up (see below). You can also change from self-employment to limited company at any point (although slightly messier to change the other way round).