Pros and Cons of setting up a Limited Company

One of the first decisions you will make as a new business owner is what regulatory structure is best for your business. Depending on the type of industry you are in, your target clientele and your anticipated turnover, there may be several options available to you.

The most popular and flexible option for a new business owner is usually setting up a limited company. As with any regulatory structure, there are pros and cons of setting up a limited company. These are covered in detail below.

Pros of setting up a limited company

1. Shares

The creation and distribution of shares is a unique feature of a limited company. As a private company you can issue various classes of shares as opposed to a sole trader. The quantity, type and issuance of shares can be determined based on the needs of a growing business.

This enables multiple owners and operators of the business, and allocates a fair and regulated process for profit sharing, raising investment and founder exits.

2. Financial

A key pro of setting up a limited company is the extent to which a Director can be personally held liable for the financial losses of the business. Limited liability means that in most cases, all debts will remain the debt of the business and no individual will experience personal financial liability.

Of course, this is not a feature that should be relied upon to build unethical and unsustainable business practices. Directors and founders can still be found liable if they are assessed to have acted erroneously or disingenuously.

The structure of a limited company is also designed to make the revenue of the business more tax efficient. Profit can be extracted from the business in other ways than wages, and dividends can be paid to investors. While wages from a self-employed entity would be taxed at the personal income tax rate, income into a limited company can be taxed through corporation tax. Directors can also take advantage of loans or dividends to boost their income through the business structure, while still being HMRC compliant. Pensions paid into are pre-tax.

Tax efficiency is important in a growing business and should never be confused for tax avoidance or tax evasion. The taxes in a limited company are lessened compared to a sole trader, enabling accelerated growth and return on investment.

3. Logistics

Growing businesses may need alternative sources of income in the form of investments to maintain their growth. With the regulated and structured nature of the shareholdings in a limited company, investors have clarity and confidence that their investment will be rewarded with a relative stake in the business.

Equity can be offered to early employees and this pro of setting up a limited company can be seen as a great motivator to recruit experienced talent that the business may not have otherwise been able to afford.

The logistics of shareholder meetings, dividend payments and corporate governance are made simpler by having clear guidelines and it may be easier to raise capital.

If you are planning a clear business exit strategy it can also be easier to sell or retire from a limited company.

Of course, every decision as a business owner also comes with an alternative set of options. Below are three key ‘cons’ of setting up a limited company.

Cons of setting up a Limited Company

1. Privacy

All information for a limited company must be made public and is easily accessible online. This can cause some privacy concerns for business owners who would rather not make their business address public.

As a Director of a limited company, you will be held to a higher standard both professionally and personally. Unethical practices or morally questionable behaviour could lead to you being struck from the Director’s register. This means you would be unable to hold any Directorship within the UK for a certain period or indefinitely.

Individuals with such privacy concerns may wish to consider the advantages of a registered office address.

2. Administration

Limited companies have greater scrutiny and regulation in areas such as the creation and provision of company accounts and dealing with Companies House. You will need to engage with licensed professionals to submit yearly documentation and all revenue, profits and losses will be made public.

However, increased administration may not necessarily be a con of setting up a limited company, as it provides you with a clear roadmap to building and growing your business and your responsibilities as a Director.

3. Cost

The cost of setting up any business can be prohibitive. Depending on the industry you are in or the type of customer you are targeting, startup costs can quickly build up.

Limited companies incur additional costs of incorporation in the form of regulatory compliance and submission of key documents, and for some, this can be seen as a major con of setting up a limited company. If these early fees seem overwhelming just consider the positive impact that this will have on the success of the business if the foundational parts are taken care of.

There are always ways to reduce costs, and depending on your turnover you can find affordable professional fees for necessities such as accountancy support.

Next steps when setting up a Limited Company

It is important to think about the future of your business when identifying the most suitable form of business entity. If you have plans for growth and expansion, you want to ensure that you have a structure capable of supporting this growth. There are many resources to support you, and MSP Secretaries will be there for you every step of the way.

To find out more about the services MSP Secretaries can provide to help your business, or to discuss the pros and cons of setting up a limited company in more detail, please get in touch.