Choosing the best legal structure for a new or existing business requires careful consideration. The sole trader model is the most popular, closely followed by the limited company structure. There are pros and cons to both. However, the limited company advantages typically surpass the benefits of operating as a sole trader.
If you plan to run a commercial business, a company limited by shares is the ideal choice. Whereas, if you want to set up a charity or not-for-profit enterprise, a company limited by guarantee is the better option.
In this post, we provide an overview of the advantages and disadvantages of a limited company. To provide a fair comparison, we also outline the pros and cons of running a business as a sole trader. This information should help you make an informed decision. However, it’s always worthwhile speaking to an accountant for professional advice tailored to your specific needs.
Top 10 limited company advantages
The principal reasons for trading as a limited company are flexible ownership, limited liability protection, and tax efficiency. There are also several lesser-known advantages over the sole trader structure. Below, we discuss each of these in turn.
1. Flexible ownership
The limited company structure offers flexibility regarding ownership and internal management arrangements. In a private company limited by shares or guarantee, you must have a minimum of:
- one member (shareholder or guarantor), who owns and controls the company by holding at least one share or providing a guaranteed sum to the company
- one director, who manages the company on behalf of its member(s)
These two roles can be held by the same person or different people. This means that you can set up a private limited company by yourself (as the sole member and director) or with other people.
Unlike the sole trader structure, companies can have different owners and directors throughout their existence. They can issue shares to new investors or admit new guarantors at any time. Existing shareholders can also sell or transfer some or all of their shares to other people.
Moreover, members have the power to appoint and remove directors at any time after incorporation. This means you can appoint someone else to run the business on your behalf or even sell or transfer ownership of the company.
2. Limiting personal liability
One of the biggest benefits of forming a company is limited liability protection. Simply put, if your company runs into trouble, your personal finances and assets are secure beyond what you’ve already invested in the business or agreed to pay.
This is because a limited company is treated as a separate legal entity—a legal ‘person’ in its own right. As such, the company is entirely separate from its members and directors.
Any debt, losses, or legal claims associated with the business are the responsibility of the company itself. If it becomes insolvent (bankrupt) and can’t afford to pay its creditors, the members are only liable up to the nominal value of their unpaid shares or guarantees. Beyond that, their personal assets are protected.
It is common practice to set the nominal value of shares and guarantees at £1. This means that your liability could be as little as £1, depending on the number of shares you hold or the guarantee amount you provide.
However, there are rare instances (such as fraud or wrongful trading) where directors may be liable. Likewise, if any members or directors provide personal guarantees to creditors for company borrowing or other contractual arrangements (e.g. commercial leases).
3. Tax efficiency and planning
Limited companies in the UK pay between 19% and 25% Corporation Tax on profits, whereas sole traders pay 20-45% Income Tax (or 19-48% in Scotland) on their profits. These lower rates for companies offer greater potential for tax efficiency and flexible tax-planning strategies.
Tax-efficient personal remuneration
By setting up a company, you can reduce your Income Tax and National Insurance contributions (NIC) by taking a combination of a director’s salary through PAYE and dividend payments from shares.
If you keep your director’s salary below the NIC Primary Threshold (£12,570), you won’t have to pay any Income Tax or employee Class 1 NIC on those earnings. Furthermore, the company won’t have any Corporation Tax liability on the salary because wages are a tax-deductible business expense.
You can take the rest of your income as dividends, which are paid from profits after the deduction of Corporation Tax. You will benefit from the annual £500 dividend allowance (2024/25 tax year), so you won’t pay any personal tax on the first £500 of dividend income.
Above this sum, you will be required to pay dividend tax. However, dividend tax rates are much lower than Income Tax rates. Depending on your level of annual profits, you could save thousands of pounds in personal tax every year by operating as a limited company and strategically planning your remuneration.
Reinvesting surplus cash
Rather than withdrawing all available profit and paying more personal tax on top of your Corporation Tax liability, you can retain surplus income in the business to pay for future operational costs and grow the company.
This makes more sense than taking all profits as personal income, paying higher rates of Income Tax, and then reinvesting your own money when the business needs additional capital.
Deferring personal income
You can defer the withdrawal of profits to a later tax year when a lower rate of personal tax would apply. This is an efficient strategy if removing all profit in the year it’s generated would take you into a higher Income Tax band or dividend tax bracket.
4. Professional status
Your professional status and image can improve considerably by trading as a limited company rather than as a sole trader. This difference in perception stems largely from the fact that incorporated businesses are more rigorously monitored.
Limited companies have more complex accounting and reporting requirements, their statutory compliance obligations are much greater, and their corporate details and accounts are publicly available on the Companies House register.
A more professional image, coupled with the benefits of corporate transparency, can benefit your business in many ways, such as:
- attracting new clients and investors
- accessing a wider range of lending opportunities
- expanding into different locations or markets
- creating a valuable and trusted brand identity
- competing on an even playing field with other businesses in your industry sector
Whilst the activities, ownership structure, and internal management of the business may be the same whether you operate as a sole trader or limited company, the latter structure is typically held in much higher regard.
5. Separate legal identity
Unlike the sole trader structure, a limited company is a legal ‘person’ in its own right, with an entirely separate identity from its owners and directors. This means that companies can enter into contracts in their own name and are responsible for their own debts and liabilities.
As previously mentioned, the owners are only liable (in most cases) for the value of their unpaid shares or personal guarantees, rather than the full extent of the company’s liabilities. If a company is insolvent, it is the business itself that becomes bankrupt, not the shareholders or directors.
Furthermore, companies enjoy perpetual succession, existing beyond the original members and directors. As such, a company can be sold or transferred to other people at any time, continuing to operate regardless of who owns and manages the business. This is not the case with a sole trader business.
6. Credibility and trust
The professional status of a limited company structure can add prestige and credibility to your business. In fact, certain businesses and agencies (particularly in the IT, finance, and construction industries) will only work with other incorporated businesses. This is usually due to the level of risk involved in the contracts they award.
If you’re likely to be dealing with sensitive information, complex IT projects, or large-scale construction contracts, for example, your clients may demand limited liability protection from all contractors because the associated risk of such work is particularly high.
In most cases, sole traders are simply not considered for these types of contracts, so trading through a company is a great way to improve your competitive advantage.
7. Investment and lending opportunities
Companies can have multiple owners or multiple shareholders, so it is possible to raise additional capital by selling portions (‘shares’) in the business to new investors.
Generally, companies also have access to more lending options than sole traders, and certain banks will only lend to incorporated businesses.
Furthermore, it is often possible to secure a loan for a company without the need for shareholders or directors to provide security against their own assets.
8. Protecting a company name
All company names must be unique, so no two companies can be set up with the same name, or even names that are very similar to one another. When you register a company, no other business can use your company name. This same protection does not apply to the business name of a sole trader.
9. Pension contributions
Setting up a limited company provides the opportunity to invest pre-tax trading income in a company pension scheme, as opposed to making only personal contributions from your wages or other earnings. And since employer contributions are an allowable business expense, your company will receive tax relief against its Corporation Tax bill.
10. Splitting income
If you own a company limited by shares, you can issue or transfer shares to your spouse/partner and family members. This will allow you to split your business profits and minimise personal tax liabilities.
By issuing dividends to your spouse or children, for example, you can take advantage of their tax-free Personal Allowance, basic tax rate, and the £500 tax-free dividend allowance.
This strategy can be incredibly beneficial if you are the sole or highest wage earner in your household or if you regularly provide financial support to your children. However, you should speak to an accountant or tax advisor before doing so.
Disadvantages of a limited company
There are certain disadvantages associated with limited company formation, as one would expect from anything that provides so many advantages. However, most of these perceived drawbacks pale in comparison to the potential benefits on offer.
The most notable disadvantages of setting up a company are as follows:
- Limited companies must be incorporated at Companies House, and you will be required to pay an incorporation fee
- Company names are subject to stricter rules and regulations than sole traders
- You must maintain a registered office address in the UK jurisdiction where you choose to incorporate your company
- You cannot set up a limited company if you are an undischarged bankrupt or a disqualified director
- Certain personal and corporate information will be publicly available on the Companies House register
- Accounting requirements are often more complex and time-consuming than those applicable to sole traders. As such, you may need to appoint an accountant to help you with your tax and accounting affairs
- You need to follow strict procedures when taking money out of a company for personal use
- Limited companies have more filing and reporting requirements than sole traders. This includes filing an annual confirmation statement and annual accounts with Companies House, and preparing a Company Tax Return and accounts for HMRC every year
- Companies must adhere to strict record-keeping requirements, including taking minutes of meetings and recording all formal decisions taken by directors and shareholders
- If you make any changes to your company details, you need to notify Companies House
These compliance and accounting requirements can appear daunting at first, though many company owners manage such tasks themselves. However, if you feel that you don’t have the time or experience to handle the administrative burden, you can appoint an accountant and professional company secretary to deal with certain aspects on your behalf.
About sole trader businesses
Setting up as a sole trader is one of the easiest things to do in terms of registration and administrative requirements. However, there is no legal distinction between the business and the sole trader.
This means that you would be wholly and personally responsible for all business debts and liabilities. Your home and other assets would be at risk if you were unable to meet your financial obligations or if legal action was taken against the business.
On the flip side, because there is no legal distinction between your personal finances and business finances, there is no need to go through any complex procedures to remove money for personal use.
Pros and cons of the sole trader structure
The sole trader structure is ideal for many small business owners, particularly freelancers who have only a few clients and/or have average earnings below £35,000 a year.
However, there may come a time when it is financially or professionally beneficial to consider limited company formation. If you reach that point, your first port of call should be an accountant. They can advise on the best course of action.
| Pros | Cons |
|---|---|
| Quick and easy to set up online; no need to register with Companies House | Unlimited personal liability for debts and legal claims |
| No need to pay a registration fee to HMRC | More challenging to raise capital and acquire loans |
| Typically low startup costs and expenses | Can only be set up and owned by one person |
| Easy to remove profits for personal use | Required to pay Income Tax between 20-45% (or 19-48% in Scotland) |
| Minimal accounting costs and requirements | You pay Income Tax and NIC on all business profits |
| You will own all business profits and assets | Many firms refuse to do business with sole traders |
| No requirement to disclose accounts or personal details on public record | Not eligible for Statutory Maternity Pay |
| No requirement to make business records available for public inspection | The professional status of sole traders is not as highly regarded as the limited company structure |
| Minimal paperwork and record-keeping requirements | No option to defer withdrawals until a later tax year or reinvest surplus cash without paying tax |
| No need to maintain a registered office address or service address | Pension options are less tax-efficient |
| Fewer restrictions when choosing a business name | Unable to issue profits to a spouse or family member as tax-free dividend payments |
Limited company or sole trader?
There is no doubt that company formation will reduce your liability if your business faces financial difficulty or legal action. A limited company also offers many tax-planning benefits and can enhance your professional image. Moreover, you can set up a company for non-profit or charitable purposes.
However, you need to weigh these limited company advantages against the additional administration and accounting requirements. And depending on your level of profits, a company may not be more tax-efficient, so you need to bear this in mind.
It’s free to set up as a sole trader, and there is far less administration involved. It’s ideal for many freelancers and small business owners who are just starting out, have very few clients, or generate annual profits below a certain amount.
To choose the best structure for your business, your decision should be based on your personal circumstances and preferences. If you’re at all unsure you should seek professional advice from an accountant or advisor.
Thanks for reading
We hope you’ve found this post helpful in understanding the potential advantages of running your business as a limited company and how the structure compares to the sole trader model.
Please comment below if you have any questions. You can also contact our company formation team if you’d like to speak to someone about setting up a company limited by shares or guarantee.
Your article sheds light on the advantages of public limited company registration. It’s an opportunity for businesses to showcase their potential, access diverse sources of capital, and raise their profile in the competitive market. Thank you for sharing such information about Public Limited Company.
Thank you for your kind words.
Kind regards,
The Rapid Formations Team
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Thanks for your kind comments – we’re glad you are enjoying our blog articles.
Kind regards,
The Rapid Formations Team
Hello,
I’m employed full time but also want to setup a gardening business? I do currently submit a separate self assessment for claiming back work expenses but just wanted to know which was best for my situation a sole trader or ltd company. I will only be turning over around 2k initially
Also if I gkk ok into the higher rate tax bracket will I have to pay more than the 19% corporation tax
Thank you for your kind enquiry, Mitch.
With regards to paying Corporation Tax – there are no ‘bandings’ for Corporation Tax and therefore all relevant profits are taxed at the same amount. Please note that from April 2023 Corporation Tax is due to rise to 25%.
With regards to what is better for you – this is a decision you will need to make yourself. You will probably need to factor in the annual filing requirements costs into whether or not running via a limited company is better for you or not. In general terms, the more money made via a self employed venture, the more beneficial a limited company is, because the annual filing requirement fees (including accountancy fees) reduce as a % of the revenue earnt. In addition, the risk is limited to the liability of the shareholder. We would suggest you make a projection as to how likely it is that your income is going to rise via this venture to well beyond £2,000, and then make a decision based on this.
You should also factor in that many customers prefer to deal with a limited company rather than a sole trader, and that being a sole trader may lead to you losing custom due to lack of trust.
We trust this information is of use to you.
Kind regards,
The Rapid Formations Team
Hi,
I am impressed with the answers you have supplied to others, and hope you can help us.
We, husband and wife,, are considering the possibility of setting up a non-profit making limited company for the purpose of owning our road, which is not adoptable by the local council.
We and neighbours have spent a lot of money improving the road, which now seems at risk of damage from a new development nearby, so we need insurance and legal status. If we have, say, 3 directors with £1.00 shares each, would this basis be practical in law?
We would then need to apply for the deeds from, I think, Chancery Division.
My husband is currently Chair of our Residents Association but this is likely to disband soon.
Dear Sheila
Thank you for your kind words. Unfortunately we cannot advise on the structure of any business as we are not professional advisors and we would advise that you speak to an accountant or lawyer to get the correct advice to deal with this more unusual business concept.
Best Regards,
What hapoens with the state pension siruatuon when you become a ltd company.
Dear Am Baio,
We are not pension advisors however if you are receiving state pension and form a limited company then you would declare the state pension on a tax return along with any income taken from the limited company.
Kind Regards,
Rapid Formations Team
I am changing from sole trader to limited company is it possible to retain my gross payment status for tax purposes?
Dear Stan,
Thanks for your message.
We are not experts on Construction Industry Scheme tax so I would advise you either call HMRC on 0300 200 3210 or speak to an accountant.
Kind Regards
Ohh thanks very much for advising i think limited companies has more advantages than sole bcs personal property are secured.name of company is boomed etc
Must be officially incorporated at Companies House
Required to disclose personal and corporate information on public record.
can you explain more on those two disadvantages of a limited company
Dear Lee,
Thank you for your message. The two disadvantages you have highlighted are very similar in nature. The point being made is purely from a privacy perspective in that if you were to set up a business as a sole trader or partnership (not Limited Liability Partnership), your information would remain private, whereas limited companies have to comply with the Companies Act which requires certain details to be available to the public through the Companies House website (such as the names of directors, the company address etc).
Best regards,
Rapid Formations Team
If I am a sole trader registered for vat and change to a limited company do I still have to be vat registered as a limited company ? thanks for your time,
Kind regards,
Carl
Hi Carl,
If your annual turnover is less than the VAT registration threshold (currently £83,000), VAT registration for your new company is entirely optional. If you’re changing your existing sole trader business to a company and you would like to be VAT registered, you should actually be able to transfer your current VAT registration rather than having to de-register and re-register: https://www.gov.uk/government/publications/vat-request-for-transfer-of-a-registration-number-vat68
I always find it best to speak to HMRC directly in situations like this, so I would advice calling the VAT helpline to discuss your options. You can find the contact details here: https://www.gov.uk/government/organisations/hm-revenue-customs/contact/vat-enquiries
I hope this helps!
Best wishes,
Rachel
Many thanks for your valuable advise you give people.
I am forming a ltd company where am a sole director n shareholder. Please advise in the following;
Does nominal capital of kes 100k mean I have to contribute from my pocket?
Does fees or charges by advocate form part of the nominal capital?
In case I need more capital to run day to day activities and pay salaries, can I borrow from a friend?
Can I dictate the salary I want and when can I start paying myself?
Hi Peter,
You’re most welcome – I’m pleased to hear that you find the advise useful.
1. If you set the nominal capital of your shares at £100,000, you will be personally liable to contribute £100,000 to the company if it is unable to pay its debts. You would not have to contribute that sum of money initially, unless you were using it as start-up capital, though I would strongly advise against setting such a high nominal capital. Perhaps consider issuing 10 or 100 shares with a nominal capital of £1/share – this is a popular choice, but it is entirely up to you and something you may wish to speak to an accountant or professional advisor about before making a decision.
2. Fees and charges paid to solicitors/accountants/advisors are deductible expenses that must be included in your accounts if the payments are made from your company’s bank account. These expenses have nothing to do with nominal share capital.
3. It is solely your decision if you wish to borrow money from friends or family, but you must record this income and report it in your accounts.
4. You can choose how much to pay yourself as a salary and you can do this as soon as the company has available funds. Your director’s salary will be a tax-deductible expense for the company.
I would strongly urge you to seek professional advise from an accountant regarding these matters, especially if you are considering investing a significant sum of money in the business. I’m not an accountant, so I’m afraid I cannot provide any specialist advise.
Best wishes and good luck with your new business!
Rachel Craig
Hi Rachel,
I run a sole trader business and we are going to exceed VAT Registration Threshold so I am going to change to Ltd Co. before we register for VAT.
With this in mind, can you advise whether I will be required to register for VAT as a Ltd Co. immediately or is the turnover as a sole trader disregarded due to the change of legal entity (and then wait until the turnover as Ltd Co. nears VAT Threshold)?
I have also invested around £15,000-£20,000 over the past few years on plant which would be VAT deductible so would not want to lose out on the opportunity to claim this back… in which case should I register for VAT as a sole trader and delay Ltd Co. status for a year or two?
Hi Ron,
Thanks for your message.
This is quite a complex situation so I’m afraid I am unable to give you a concise answer. I would advise contacting HMRC directly to explain what you wish to do and find out what your options are.
Sorry I cannot be of more help.
Best wishes,
Rachel Craig
When changing from a sole-trader to a limited company who do I need to inform.
Hi Richard,
Thanks for your email.
You need to inform Companies House, HMRC, your clients, suppliers and all business-related service providers.
To register your existing business as a limited company, you must complete an application for Companies House. It’s very easy and only takes a few hours. Find out more here: https://www.rapidformations.co.uk/help-centre/steps-to-forming-a-company/
You will also need to tell HMRC that you are stopping self-employment. Click this link for guidance on how to do that: https://www.gov.uk/stop-being-self-employed
When your company is registered and you are ready to start trading through it, you should update your website and business stationery with the required details. You can find out about these legal requirements here: https://www.gov.uk/running-a-limited-company/signs-stationery-and-promotional-material
You may wish to open a business bank account in your company name, so you will have to inform service providers and suppliers about your new bank details. This will also affect the information you include on your client invoices.
I hope this information helps but please get back to me if you want to know anything else or need help setting up your new company.
Best of luck,
Rachel
can you help me set up as a sole trader?
Hi Ranjit,
We do not deal with sole trader businesses because they do not have to be registered at Companies House. However, it’s really easy to set up as a sole trader. You can do it online via HMRC. This link will explain how to do that: https://www.gov.uk/set-up-sole-trader/overview
Please let me know if you need anymore help.
Best wishes,
Rachel