Advantages and Disadvantages: Limited Company Vs. Sole Proprietorship
Functioning as a sole trader may be a great way to work for a small business and often very effective for many people running a small company. But they have another option to operate their business as a limited company.
However, operating as a limited company is not necessarily the perfect choice for most because they will have to deal with several issues in the process. It can be pretty complex to start a new limited company. Of course, you get rewarded with benefits like getting a more professional appearance and a more favorable tax situation.
Let us now learn about the advantages and disadvantages of setting up a limited company than a sole proprietorship, allowing us to understand if we will benefit from opening a limited company and whether it is going to be a perfect choice or not.
The decision can be beneficial to you for several reasons. A few significant positives of becoming a limited company are as follows:
Getting additional tax benefits can be the first primary reason for becoming a limited company in place of being a sole trader. You can generally take maximum tax-free income as a director of your limited company. As of 2022, you may claim an allowance of 12,570 as your salary and balance income in the form of dividends.
It benefits you a lot because you do not have to pay any national insurance contribution on dividends. Moreover, you will be paying only 19% of your company profits as corporation tax than 20%-45% as income tax if you operate as a sole trader.
Choosing to become a limited company limits your liability, and you will not be liable for the business as you will be as a sole trader. It implies that all your assets and finances are protected if the company incurs debts and goes bankrupt.
Sole traders have total liability for their business actions and are responsible for entering into legal contracts. On the other hand, limited companies allow much greater flexibility to the management and are hugely beneficial because they are separate legal entities.
When you operate as a limited company, you get a more professional appearance. Even if you are a single individual involved, it appears more significant and more professional to others. Although it may seem a little less unimportant advantage, it can make a tremendous difference in how customers and other businesses perceive you. It will get you considered for assignments that may not come to you as a sole proprietor.
A sole trader business has several inherent pros and cons. Similarly, besides the benefits mentioned above, a limited company also comes with a few significant disadvantages as follows:
You undoubtedly get a wide range of benefits with becoming a limited company, but it is pretty complex to set it up. In contrast, it is relatively easy to set up a sole trader business by simply registering with HMRC. On the other hand, you will have to register as a limited company with companies house and pay fees. For the first-timers, it can be a daunting process.
Unlike the Sole trader business, you will face a range of additional challenges to manage the accounts of a limited company. According to specialists of small businesses, limited companies may have to deal with tax planning, book-keeping, payroll, not to mention keeping company accounts up to date, managing business expenses, and addressing tax return issues. Moreover, if you fail to submit tax returns correctly, you may have to pay fines and face other punishments.
Sole traders make all of their decisions in isolation, and they have to justify their choices only to themselves. But it is not so simple for limited companies with multiple shareholders. Those shareholders will have a say in how the business will be run, and you have to appease all of them to run the business smoothly, complicating matters significantly.
Limited companies have to register with Companies House, and they share information about company accounts, their shareholders, names and addresses of directors, etc. It means that such financial records and personal details are available to anyone who can access them.