Pros and Cons of a Limited Company Structure

Choosing the right business structure is a crucial decision for entrepreneurs in the UK. According to Companies House, more than 5 million limited companies are registered in the UK, and over 500,000 are set up each year. 

Many business owners opt for this structure because of its tax efficiency, credibility, and legal protection. However, running a limited company also comes with administrative responsibilities and compliance requirements. 

This guide explores the advantages and disadvantages of setting up a limited company, helping you decide whether it’s the right fit for your business.

What is a Limited Company?

A limited company is a business structure in the UK that operates as a separate legal entity from its owners. This means the company itself can own assets, enter contracts and be held liable for its debts. This is unlike sole traders, who are personally responsible for their business obligations.

Key Features of a Limited Company

• Separate Legal Entity: The company is distinct from its directors and shareholders, providing limited liability protection for owners.
• Directors and Shareholders: A limited company is managed by company directors, while shareholders (who may also be directors) own the business by holding shares.
• Company Pays Corporation Tax: Unlike sole traders, who pay income tax and national insurance on all earnings, a limited company pays corporation tax on its profits.
• Registered with Companies House: A limited company must be officially registered with Companies House, and its financial details are publicly available.

This structure is commonly used by entrepreneurs, contractors and growing businesses looking to raise capital and benefit from tax efficiencies. However, it also comes with additional responsibilities, which we’ll explore in the next sections.

Advantages of a Limited Company

Operating as a limited company provides several benefits that can make it an attractive option for business owners. From financial protection to tax advantages and greater investment opportunities, this section explores the key advantages of setting up a limited company in the UK.

1. Limited Liability Protection

One of the biggest advantages of a limited company is limited liability protection. This means that business owners are not personally liable for the company’s debts beyond their invested share capital.

• If the company faces financial difficulties, the personal assets of directors and shareholders remain protected unless they have provided a personal guarantee for a loan.
• This contrasts with sole traders, who are personally liable for all business debts, putting their personal assets (such as homes and savings) at risk.

By separating business liabilities from personal finances, limited liability offers business owners greater security and peace of mind.

2. Tax Efficiency

Operating as a limited company can be more tax-efficient compared to being a sole trader, particularly for higher earners.

A limited company pays corporation tax on its profits, which is typically lower than the higher rates of income tax that sole traders must pay on all their earnings.

• Directors can pay themselves through a combination of salary and dividends, reducing their liability for income tax and national insurance contributions.
• Limited companies can offset business expenses against taxable profits, reducing their tax bill. Expenses such as office costs, equipment, and staff salaries can be deducted.
• Some businesses may also benefit from tax relief schemes such as R&D tax credits or capital allowances, further reducing tax liabilities.
  

While tax efficiency is a strong incentive, business owners should carefully assess their income levels and long-term financial strategy before deciding if a limited company is the best option.

3. Easier to Raise Capital

A limited company has more options when it comes to raising funds for growth and expansion.

• Unlike sole traders, limited companies can issue shares to attract investment from shareholders and external investors.
• Many banks and financial institutions prefer to lend to limited companies over sole traders, as they are seen as more stable and structured.
• Venture capital firms and angel investors are more likely to invest in limited companies, as they can take an equity stake in the business.
• A limited company’s financial records are publicly available, which can improve transparency and credibility with potential investors.
  

For businesses planning to expand, the ability to raise capital through share issuance and external funding makes a limited company a more attractive option.

4. More Control Over Business Profit

A limited company structure offers business owners greater flexibility in managing profits compared to sole traders.

• Directors and shareholders can decide how to distribute profits, often through a combination of salary and dividends, to optimise tax efficiency.
• Unlike sole traders – who must pay income tax and national insurance on all profits – limited company owners can minimise personal tax liabilities by choosing how to withdraw earnings.
• Profits retained within the company can be reinvested in the business for growth, expansion or future tax planning.
  

This flexibility provides financial planning advantages, making it easier for business owners to manage their personal income and tax obligations strategically.

5. Business Credibility and Professionalism

Operating as a limited company can enhance a business’s credibility and professional reputation.

• Many clients, suppliers and investors prefer to work with limited companies, as they are seen as more established and reliable compared to sole traders.
• Some large organisations only do business with incorporated entities, particularly in industries such as finance, IT and consulting.
• Having “Ltd” in the company name can signal trust and permanence, making the business more attractive to customers.
  

A limited company structure reinforces professionalism, helping businesses gain a competitive advantage in their industry.

6. Business Continuity

Unlike a sole trader business, which ceases to exist if the owner retires or passes away, a limited company continues to operate regardless of ownership changes.

• A limited company remains a separate legal entity, meaning it can exist indefinitely, even if directors or shareholders change.
• Shares can be transferred, sold or inherited, making it easier to manage business succession planning.
• This stability is beneficial for companies looking for long-term growth and sustainability.
  

Additionally, if a business owner chooses to exit, they can sell shares or transfer ownership more easily than sole traders, who must sell their business as an entire entity.

7. Easier to Transfer Ownership

A limited company structure makes it simpler to transfer ownership compared to sole trader businesses.

• Shares can be sold, transferred or inherited, allowing for a structured handover process.
• Business owners can gradually transition out of the company while retaining a stake or control during the process.
• If multiple shareholders are involved, the transfer of ownership can be managed through share agreements and company bylaws, ensuring stability.
  

For those planning succession or future exit strategies, a limited company provides greater flexibility than sole trader businesses, which typically require a complete sale or closure.

Disadvantages of a Limited Company

While a limited company offers many advantages, it also comes with additional responsibilities, costs, and regulatory requirements. Before deciding to incorporate, business owners should consider the challenges associated with running a limited company.

1. Administrative Burden

Limited companies have more complex legal and financial responsibilities compared to sole traders. 

Business owners must register with Companies House and comply with annual filing requirements, including:

• Annual Confirmation Statements to confirm company details.
• Filing annual accounts and corporation tax returns with HMRC.
• Keeping detailed business records, including financial transactions and director/shareholder changes.

Directors must ensure the company follows corporate governance rules or risk penalties and disqualification. The increased paperwork and regulatory requirements can be time-consuming, often requiring the support of accountants or business advisors.

2. Higher Setup and Running Costs

Setting up and operating a limited company involves higher costs than being a sole trader.

• Registration fees apply when setting up the business with Companies House.
• Accountancy fees can be higher, as limited companies require formal financial statements and tax filings.
• Businesses may need legal support for shareholder agreements, contracts, and compliance matters.

Additionally, companies may face ongoing costs, such as business insurance, payroll systems and regulatory compliance fees. These expenses can be a barrier for smaller businesses considering incorporation.

3. Less Privacy

Unlike sole traders, limited companies must disclose certain information publicly, which can be a concern for business owners who value privacy.

• Company details, including financial records, director names and registered office addresses, are available on Companies House for public viewing.
• Some business owners may prefer to keep their financial affairs private, but limited companies must file annual accounts that disclose financial performance.
• Competitors and third parties can access company records, making financial transparency both an advantage and a potential drawback.

While using a registered office address service can protect a director’s home address from public records, the overall lack of privacy is something to consider when forming a limited company.

4. Personal Guarantees for Loans

Although limited liability protection is a key benefit of a limited company, some business loans and credit agreements require a personal guarantee from directors.

• If a company takes out a loan, banks and lenders may ask directors to provide personal guarantees, meaning they could still be personally liable for debts if the company defaults.
• This removes the limited liability protection in certain financial agreements, increasing personal financial risk.
• Directors should assess the risks carefully and, where possible, explore funding options that do not require personal guarantees.

For businesses seeking external funding, this is an important consideration, as not all financial obligations are automatically covered by limited liability protection.

5. Profit Distribution Constraints

In a limited company, profits do not automatically belong to the business owner, unlike sole traders who can withdraw profits as personal income at any time.

• Company profits belong to the business until dividends are declared and distributed to shareholders.
• Dividends can only be paid out if the company has sufficient retained earnings, meaning owners cannot freely withdraw funds without proper accounting records.
• Directors taking a salary and dividends mix must consider corporation tax, personal tax and dividend tax rates, which adds complexity to financial planning.

This structured approach to profit distribution requires careful tax planning to ensure owners optimise their income efficiently while staying compliant with HMRC rules.

6. Potential for Double Taxation

One of the financial drawbacks of operating as a limited company is the potential for double taxation.

• The company pays corporation tax on its profits before any earnings are distributed to directors or shareholders.
• When dividends are taken, shareholders must pay dividend tax, meaning profits are effectively taxed twice.
• In some cases, sole traders may be more tax-efficient, particularly at lower income levels, where they are only taxed once under income tax and national insurance.

While tax efficiency can still be achieved through salary and dividend structuring, business owners must consider whether the benefits of a limited company outweigh the impact of double taxation.

7. Stricter Compliance with Rules and Regulations

A limited company must comply with more regulations than a sole trader business, increasing the risk of penalties for non-compliance.

• Directors must ensure that annual accounts and tax filings are submitted on time.
• The company must maintain accurate business records, including details of directors, shareholders and financial transactions.
• Non-compliance with Companies House regulations or tax laws could lead to financial penalties, director disqualification or legal action.

This increased level of regulation makes running a limited company more complex, often requiring specialist accountants and legal advisors to ensure compliance.

Is a Limited Company Right for You?

Deciding whether to set up a limited company depends on your business goals, tax strategy and long-term financial plans.

If you value limited liability protection, tax efficiency and greater funding opportunities, a limited company may be a strong choice.

However, if you prefer simplified tax reporting, fewer regulations and more direct access to profits, operating as a sole trader may be more suitable.

Factors such as business profit levels, future growth, and administrative capacity should be carefully considered before making a decision. Seeking professional financial advice can help business owners determine whether a limited company is the best structure for their specific needs.

Limited Companies vs Other Business Types

When deciding whether to set up a limited company, it’s important to compare it with other business structures. Each type has its own advantages and drawbacks, depending on the size, goals and financial needs of the business.

Sole Traders vs. Limited Companies

Many small business owners start as sole traders because it’s the simplest structure, but there are key differences between sole traders and limited companies.

Sole traders benefit from simplified tax reporting but lack financial protection and funding options. Limited companies, on the other hand, provide greater credibility, tax efficiency and liability protection, making them a preferred choice for growth-oriented businesses.

Limited Companies vs. Public Limited Companies (PLCs)

A Public Limited Company (PLC) is another form of a limited company but differs significantly from a Private Limited Company (Ltd) in terms of ownership, regulatory requirements, and funding options.

A PLC is better suited for large companies looking to raise significant capital by selling shares on the stock market, while a private limited company is more common for small and medium-sized businesses that want more control over ownership and decision-making.

Limited Companies vs. Partnerships

A partnership is a business structure where two or more individuals share ownership, responsibilities, and profits. While partnerships and limited companies have some similarities, they differ in terms of liability, taxation, and business structure.

What About Limited Liability Partnerships (LLPs)?

A Limited Liability Partnership (LLP) offers some liability protection, but partners are still taxed as individuals rather than paying corporation tax. LLPs are common for law firms, accountancy firms, and professional services where partners want flexibility while reducing personal liability.

For businesses looking for tax efficiency, liability protection, and growth potential, a limited company is often the better choice. However, for professional partnerships or businesses that value profit-sharing flexibility, an LLP may be more suitable.

How to Set Up a Limited Company

Setting up a limited company in the UK involves several legal and administrative steps, including registration with Companies House, structuring shareholding arrangements, and ensuring compliance with HMRC tax requirements. 

While this guide provides an overview of the process, business owners should consider seeking professional advice to ensure a smooth incorporation.

Step 1: Choose a Unique Company Name

The company name is a critical decision, as it must comply with Companies House regulations and be legally available.

Key Requirements for Company Names:

• The name must be unique – you can check availability using the Companies House name availability checker.
• It must not be the same or too similar to an existing company name.
• Certain words like “Bank,” “Royal,” or “Trust” require special permission to use.
• Avoid names that could be misleading about the company’s purpose or too generic.
• A registered office address in the UK is required for legal correspondence (this can be a business address or a professional registered office service).

Pro Tip: Many businesses reserve a domain name matching their company name to establish an online presence early on.

Step 2: Register with Companies House

The official registration of a limited company is done through Companies House, the UK’s corporate registry.

How to Register:

• You can register online via the Companies House website (£12 fee, typically processed within 24 hours).
• Paper applications cost £40 and take 8-10 days to process.

You will need to submit:

• Company name
• Registered office address
• Details of company directors and shareholders
• Articles of Association & Memorandum of Association (governing documents outlining company structure and shareholder agreements)

Pro Tip: You can also register your company with HMRC for Corporation Tax at the same time, avoiding a separate application later.

Step 3: Appoint Company Directors and Shareholders

A limited company must have at least one director who is responsible for ensuring compliance with legal and financial obligations.

Key Considerations for Directors & Shareholders:

Directors must be at least 16 years old and cannot be disqualified from acting as a director.

A director’s main legal responsibilities include:

• Filing annual accounts and tax returns
• Keeping accurate financial records
• Ensuring the company complies with Companies House and HMRC regulations

A company can be owned by a single shareholder or multiple shareholders. If multiple people are involved, it’s advisable to create a shareholder agreement outlining ownership rights, profit distribution, and dispute resolution procedures.

Pro Tip: Directors can also be shareholders, meaning they have both ownership and managerial control over the business.

Step 4: Define the Number of Shares and Shareholding Structure

Limited companies are owned by shareholders, with each owning a specific percentage of the business through shares.

What You Need to Know About Shares:

A company must issue at least one share, but it can issue more depending on ownership needs. The shareholding structure should be carefully considered to reflect investment levels and control.

There are different types of shares, including:

• Ordinary Shares (most common, give shareholders equal voting rights).
• Preference Shares (typically receive dividends before ordinary shareholders).

Pro Tip: If you plan to raise capital in the future, issuing multiple share classes may allow you to attract investors while retaining control over the business.

Step 5: Open a Business Bank Account

A business bank account is required to keep company finances separate from personal funds and is essential for legal and tax compliance.

Key Steps to Open a Business Bank Account:

Most UK banks require the following:

• Companies House registration number
• Proof of ID for all directors and shareholders with 25% or more ownership
• Proof of registered office address
• Company’s articles of association

Many banks offer specialist business accounts with features such as:

• Accounting software integration
• Multi-currency options (for international businesses)
• Start-up banking incentives (e.g., fee-free banking for the first 12 months)

Pro Tip: Compare different banks’ business accounts to find the best transaction fees, overdraft options, and international banking services.

Step 6: Set Up Accounting and Tax Compliance Processes

To avoid penalties and ensure compliance, business owners must register with HMRC and implement accounting practices from day one.

Key HMRC Registrations:

• Corporation Tax – A company must register for Corporation Tax within 3 months of trading.
• VAT (Value Added Tax) – Required if annual turnover exceeds £90,000 (2025 threshold).
• PAYE (Pay As You Earn) – If the company has employees, it must register for PAYE to process salaries and tax deductions.

All limited companies must file annual accounts and a Confirmation Statement with Companies House. Records of income, expenses, payroll and taxes must be maintained for at least six years.

Pro Tip: Many businesses use cloud accounting software (e.g., QuickBooks, Xero) to automate tax calculations and keep financial records in order.

Let us Help You Structure Your Business for Success

If you’re considering operating as a limited company, expert guidance can help you optimise your tax position, manage compliance, and structure your business effectively. At J. Dauman & Co., our experienced limited company accountants provide tailored advice to help business owners make informed decisions.

Need help setting up or managing your limited company? Contact J. Dauman & Co. today for professional support and strategic business advice.