What are the advantages and disadvantages of setting up a private limited company?

Ready to launch your new business? Entrepreneurs are often faced with the early task of finding out the advantages of private limited companies versus sole traders.

Find out the advantages and disadvantages of establishing private limited companies in this complete guide. We’ll cover:

• Advantages of companies
• Disadvantages of companies
• How companies compare to sole traders
• How to run your new business smoothly with Countingup

If you would like more of a background on the key differences between private limited companies and sole traders, read our article How to set up your business. If you’re ready to set up your new company then we can help you get setup with our same day service.

The ‘limited’ part of ‘private limited company’ is an important advantage when running a business as a limited company. 

It means ‘limited liability’, in other words: your personal finances are protected if the business struggles to get off the ground. Therefore, any debt owed by the company comes from its assets, not your own. This includes if anyone were ever to buy the company from you: the company takes on debt and it stays with the company (even if you don’t). 

On a personal level, this is extremely advantageous as it means you can run the business safely in the knowledge that, while your financial success is tied to the business, any financial trouble is somewhat restricted.

With private limited companies, the sky’s the limit. 

The UK business environment (including the lax legislation it operates under – discussed further later on) favours limited companies more as businesses grow past the small-medium turnover size. Investors who hold shares in limited companies can be given certain rights and sway over the company’s direction. For this reason, limited companies can grow to enormous sizes because of the assurances and confidence that investors have in the company’s future.

As a company, your business is typically taken more seriously by lenders and other investors because of the legal obligations and framework in place within your company’s equity and share structure.

This is because of two key aspects of running a limited company. Firstly, the higher admin burden you have in recording company decisions. Secondly, the potential obligation company directors have in needing to discuss and decide company directions with other shareholders. 

Companies have a more favourable tax rate than sole traders – whose profit is taxed at the personal income rates.

Currently, corporation tax is currently at 19% for companies with profits under £300,000 and 30% for companies with profits over £300,000 per year. Therefore, the more you earn, the more tax efficient it can be to use a limited company. 

Because of this, companies are better positioned to grow their business efforts and reap a larger margin of the profits they make. In turn, this can translate to higher incomes for the people who run and own shares in them.

As a limited company, you’re required to record and report more of the business’ operations and financial health while trading. This can include things like the company’s equity and share structure, as well as all the assets and liabilities it holds. 

Because of this additional requirement, company directors can face extra drains on their time, and stress from making sure their efforts are compliant with the law. Depending on your business’ current state, this might be needlessly complicated as you may be able to borrow money and operate much the same without these additional requirements. 

Therefore, timing your business’ formation as or transition to ‘company’ status is a crucial step. There are advantages to being a sole trader that you may wish to hold onto a little longer.

New companies can’t infringe on the names of existing ones. While there are similar restrictions for sole traders in declaring their trading name, the standard for limited companies is even higher. 

You’ll need to be careful to avoid using someone else’s name mistakenly and getting caught up in legal trouble from your trading. It may be best to conduct thorough research on the names of both your market competitors and any existing legal entities that hold names similar to the one you want. 

Because of the legal separation that exists between you and your company, business assets bought by the company are owned by it, not you. If you use any of the company’s assets for personal usage (like a car, laptop, accommodation, etc.) you have to declare this as a personal benefit on your tax in order to stay compliant.

While this might seem pedantic, this is in place to ensure the legal distinction between companies and their directors remains in place. It prevents business owners from buying things using company money only to enjoy them personally. 

Navigating this relationship can be difficult for new company directors; therefore, you’ll need to be careful to disclose and manage any personal usage while filling out your taxes.

Companies don’t exist as total opposites to sole traders. There is a lot of overlap between the two, including the financial records they keep and the rules they follow over things like loans and advertising.

If you’d like more information on how companies compare to sole traders, find out more in: 

• How to set up your business
• What is a sole trader?

Starting a business is an exciting time, but new business owners are too often trapped by their financial admin. With Countingup, managing your accounts as a limited company – or as a sole trader – is easy, no matter your industry. 

Countingup is the business current account with free, built-in accountancy software. You can use it to automate manual and tedious aspects of your new business’ financial admin and save time on key business tasks. 

Countingup comes with automated invoicing features and a receipt capture tool, so you can keep your financial records accurate quickly and easily. Countingup also offers real-time profit and loss statements and tax estimates from your trading – this way, you can understand your finances with just a glance. 

Gain complete confidence in your business’ finances. Find out more here and sign up for free today.