During June’s Facebook Live, I talked briefly about the pros and cons of running a limited company in the UK.
Starting and running a business in the UK offers several structures, with the limited company being a popular choice. While this approach has clear benefits, it also comes with certain challenges. This post explores the key pros and cons of operating a limited company in the UK.
Pros of Running a Limited Company
1. Limited Liability Protection:
One of the most significant advantages is the limited liability protection it provides. This means that the personal assets of directors and shareholders are protected; they are only liable for the company’s debts up to the amount they have invested.
2. Tax Efficiency:
Limited companies often benefit from favourable tax rates. The corporation tax rate is typically lower than personal income tax rates, allowing for potential tax savings. Additionally, company directors can optimize their tax position through dividends, which are taxed at a lower rate than salaries.
3. Professional Image:
Operating as a limited company can enhance your business’s credibility and professional image. Clients and partners may view a limited company as more established and reliable compared to sole traders or partnerships.
4. Access to Funding:
Limited companies may find it easier to secure funding from banks and investors. Equity financing through the issuance of shares is another option, which is not available to sole traders or partnerships.
5. Perpetual Succession:
A limited company has perpetual succession, meaning it continues to exist even if the ownership or management changes. This provides stability and can ensure the business’s long-term survival.
Cons of Running a Limited Company
1. Complexity and Cost:
Setting up and running a limited company involves more complexity and higher costs compared to other business structures. There are legal requirements for company formation, and ongoing administrative tasks such as filing annual accounts, returns, and maintaining statutory records.
2. Regulatory Compliance:
Limited companies must adhere to stricter regulatory requirements. This includes compliance with the Companies Act, maintaining proper accounting records, and ensuring timely submission of financial statements to Companies House and HMRC.
3. Public Disclosure:
Limited companies are required to disclose certain information publicly, such as company accounts, director details, and shareholder information. This level of transparency may not be desirable for all business owners.
4. Directors’ Responsibilities:
Company directors have legal responsibilities and fiduciary duties. Failure to comply with these duties can result in personal liability and disqualification from acting as a director.
5. Profit Distribution Restrictions:
The process of distributing profits in a limited company can be more restrictive. Dividends can only be paid from profits, and some specific rules and formalities must be followed to ensure compliance.
Choosing to run a limited company in the UK presents a mix of opportunities and challenges. The decision hinges on various factors, including the nature of your business, your financial goals, and your willingness to navigate the regulatory landscape. Limited liability protection, tax benefits, and an enhanced professional image are significant advantages, but they come with increased administrative burdens and regulatory responsibilities. Careful consideration and, often, professional advice are essential to determine if this structure aligns with your business objectives.
If you have any questions about the pros and cons of running a limited company, please feel free to e-mail me.