Pros and Cons of Running a Limited Company

During the August 2021 Facebook Live, I spoke about the pros and cons of running a limited company and what you need to do in terms of your accounts.

If you are running a business in the UK, there are a few options that you can choose for the business structure.

1) You can set up as self-employed where you are responsible for all debts etc relating to the business and you are personally responsible for the taxes etc.   The whole profit/loss of the business belongs to you.

2) You can set up as a partnership, where you and your business partner(s) are responsible for all debts and taxes relating to the business as per your partnership agreement.

3) If you are a not-for-profit business you could look at setting up as a Charity where a board of trustees are then legally responsible for all debts and taxes.

4) You could set up as a Limited Company where all directors and shareholders are responsible for the business in terms of debt, taxes and reporting.

You should seek proper advice from a tax advisor or accountant before choosing the legal structure for your business.

There are pros and cons to each of the types of businesses you could set up as, but I am just going to talk specifically about Limited Companies.

Pros of running a Limited Company 

  • Any debt that the company has belongs to the company and not to you personally as a Limited Company is a separate legal entity
  • The company’s finances are separate to your personal finances – your personal assets are protected if the business fails
  • Your company name is protected and no other business can use your company name; You must register the name of your business with Companies House
  • Limited Companies are often given more credibility by suppliers and customers as it provides them with a sense of confidence in the business – this seems to be due to the fact that Limited Companies are more rigorously monitored due to having more complex accounting and reporting requirements.  Their details and accounts are also available to the public.
  • More tax effective if you are earning £25,000 or more as a limited company can pay a lower tax rate than a self-employed person – Corporation Tax for the 2021/2022 tax year is 19%; once a sole trader is earning between £12,571 and £37,700, they will pay 20% tax on their income
  • You can reduce your Income Tax and National Insurance Contributions by taking a salary and dividends
  • As a Limited Company can have multiple owners, additional capital can be raised by selling shares to new investors; some banks will also only lend money to limited companies.

Cons of running a Limited Company

  • More paperwork is involved in running a limited company as you will have to file a Corporation Tax Return, accounts with Companies House, an annual confirmation statement with Companies House, and depending on whether you are set up for director’s to take their salaries through PAYE, you would also need to register as an employer and submit regular payroll information; directors would also need to submit an end of year tax return
  • As mentioned above, every year you must submit your accounts to Companies House for the business and this information is available to the public.
  • Even though your business name is protected with Companies House, names are subject to certain restrictions, also if the business name you want to use is already registered, you would need to come up with another name
  • If you have been disqualified as a director before you cannot set up a limited company
  • Due to the accounting and filing requirements being more complex, you may need to appoint an accountant
  • There are strict procedures that must be followed when withdrawing money from the business – it isn’t as simple as just taking the money out of the business the way a sole trader can
  • Limited companies must follow strict record keeping guidelines – all meetings must have the minutes recorded etc

What impact does having a Limited Company have on my accounts?

As a limited company is a completely separate legal entity, you would need to ensure that you have a separate bank account in the company’s name and that all business and personal transactions are kept separate.  You would also be required to keep your accounts for the limited company separate to any self-employed businesses you may have.

A limited company is required to keep all of their financial information for a minimum of 6 years from the end of the last company financial year they relate to.  You can store the majority of the information digitally instead of having to store the paper copies now, and it is actually advisable that you attach your receipts and invoices to the actual transactions in your account’s software.

As mentioned above, there are more documents that limited companies must file in terms of their accounts.

Every year, a Corporation Tax Return must be filed with HMRC 12 months after the end of the accounting period it covers.  For example, if your tax year runs from 01/04/2021 to 31/03/2022, you would then need to file your Corporation Tax Return by the end of March 2023.  However, the payments for your Corporation Tax are actually 9 months and 1 day after the end of the accounting year, so it is best to get the Corporation Tax Return filed as soon as you can after the tax year ends.

The directors of a Limited Company will also be required to file personal tax returns with HMRC, and these must be filed by the 31st of January of the following year.  The return for the directors would include any salary they have taken, dividends, and any other types of income they’ve had (income from shares, pensions, rental income), as well as any expenses that they can claim tax relief on – for example, pension contributions they’ve made.

You would also need to submit your accounts to Companies House, and this must be done 9 months after the accounting period ends.  Depending on the size of the limited company, it may be possible for abbreviated accounts to be submitted to Companies House.s an example of how your tax would be worked out if you were both employed and self-employed.  The names and figures are fictional and for illustration purposes only.

Every year, limited companies are also required to submit an annual return to Companies House – this is usually around the anniversary date of the incorporation of your company.  The statement just confirms that all of the information held on the public records by Companies House are still valid.  There is a cost for filing this statement and it is currently £13.00 if you file it online.

The information I have covered within this months’ Facebook Live is really just an overview as to Limited Companies.  It is advisable that before you set up a Limited Company, you discuss all of the responsibilities and tax implications with a tax advisor or a qualified accountant.  

If you have any questions about how to keep accounts for a Limited Company, feel free to e-mail me and I will get back to you!

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