Many people are unsure whether to become a Limited Company or not, as there’s no legal obligation to do so like becoming VAT Registered and also I don’t think many people actually know what the pros and cons are – so I thought I’d write a quick blog about it!
Firstly, let’s just list the key pros and cons and then I’ll go into more detail:
|Limited Liability of the Company||Director legally responsible and liable|
|More tax efficient||More paperwork and administration|
|Perceived as more professional||More expensive to run|
Limited Liability of the Company
A Limited Company is its own self-contained legal entity, unlike being self-employed you are no longer personally liable for the company – it is liable for itself.
More Tax Efficient
Again because a Limited Company is its own entity you will be able to pay yourself as an employee and/or take dividends from the profits of the company. Therefore the way you draw money out of the company is much more tax efficient than if you were a sole-trader.
Perceived as More Professional
For me this is one of the big reasons to become limited, if the industry you’re in requires a professional ‘look’ then being Limited really does make others perceive you as a bigger entity than if you were just a sole trader looking for work. In fact, I’ve even seen some tenders etc only available for Limited Companies so this is a big pro to bear in mind.
Director Legally Responsible and Liable
Although a Limited Company is its own entity and therefore liable for itself, the liability does have to fall somewhere and if you are a director or co-director then you are liable to the amount of capital that you originally put into the company. So if you invested 50% of the company’s capital at it’s start-up then you’re 50% liable for the company.
More Paperwork and Administration
As a sole trader if you’re already fed up of the annual tax returns and paperwork you have to deal with, then you need to bear in mind it is nothing compared to being a Limited Company! As a Limited Company there is a lot more paperwork especially when it comes to your annual accounts and sorting out your Corporation Tax. The paperwork increases heftily when you change to a Limited Company so if you’re quite a busy person who hates paperwork then it’s a big con to bear in mind.
More Expensive to Run
This really goes without saying, because a Limited Company is a bigger entity it costs more to run the business in regards to your ongoing accounts, especially if you’re also going to be VAT Registered which brings its own cost and paperwork. A Limited Company really does require its own accountant and legal advisors so just be prepared to have to pay out for some more serious administration costs.
I hope that helps and if you want anymore information just contact me at firstname.lastname@example.org
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