Do I need a limited company?

limited companies

Your mate Tom down the pub said you need a limited company, and it’s got you thinking. Do you need a limited company?


Well it’s a loaded question, as there is so much to think about. You need advice from your accountant tailored specifically to you, but let’s go through the basics, which will be a good starting point for you.

The Benefits

  • A limited company has many benefits, and some possible downsides, depending on your viewpoint, so let’s look at each area in turn.

1. Limited liability

  • A limited company limits your personal liability. So if anyone makes a claim against your limited company, they can’t come after you personally.
  • However, if you have given a personal guarantee (say for a bank loan, or supplier credit terms) then you would be personally liable.

2. Reputation

  • It looks professional to have a limited company, and some customers or suppliers may actually want you to be a limited company before they will trade with you.
  • This is mainly because limited companies have to comply with company law, and accounting rules and regulations.
  • There is also information available publicly on Companies House about your company, which customers and suppliers can check out.

3. Tax benefits

  • There could be advantages to becoming a limited company, but this is one to check with your accountant, to suit your own circumstances.
  • As a guide:
    • Corporation tax is currently 19% of your taxable profits.
    • If you’re self-employed or in partnership your tax is 20% or 40%, depending on whether you’re a basic rate or higher rate tax payer.
    • You also have 9% national insurance if self-employed or in partnership.
    • However if you have a limited company, you could take a low salary with no tax, and the rest of your income as dividends.
    • Dividend tax is only 7.5% instead of the usual personal tax of 20%. Or 32.5% if you’re a higher rate taxpayer, instead of 40%.
  • Woah – stop right there!
  • That is a lot of numbers! And there are so many more tax benefits, like pensions, capital gains tax. This is where you need tailored advice.
  • As a starting point, check out how to take cash out of your limited company, which talks about things like salary and dividends.

The Downsides

  • You do have to go in eyes wide open, and the downsides may outweigh the benefits for you, so let’s have a look:

1. You’re on the public record with Companies House

  • The Companies House register is public, so some details about you and your company will be visible, including addresses, directors, shareholders and your accounts.

2. Your have legal responsibilities as a director

  • This includes making sure filings are made on time to Companies House and the tax office (HMRC) and also that the Company can repay it’s debts, and trade solvently.
  • Check out this cute video from Companies House.

3. It’s not your business

  • Your limited company is a separate legal entity to you.
  • This means that income earned by the company stays in the company, it’s not yours to dip into.
  • So no nipping to the supermarket with your company debit card!
  • Instead you should extract income from your company in a considered way.

4. Taking funds out of your company

  • You can’t just take funds out of the company bank account, as we mentioned above, it’s not your bank account.
  • As a director of your company, you are an employee, so you can take a salary through PAYE.
  • You are also likely to be a shareholder, so you are able to take funds out of the company as dividends.
  • This again could be a complex area, for which you need professional tailored advice, as there are many tax implications.
  • We also have a blog on taking funds out of your company tax efficiently.

5. It costs more

  • Firstly, There are also costs to set up the limited company, whereas if you’re self employed you just need to let the tax office know.
  • You’re then looking at penalties if you don’t file on time.
    • For accounts this starts at £150 for late accounts, going up to £1,500 if they’re 6 months late.
    • You also have late filing penalties for company tax returns starting at £100.
  • Accountancy fees will also be higher, as there is so much more involved with looking after a company.
  • Typically you’re looking at about £500 more than for sole trader fees, but it does again depend on what’s involved and your personal circumstances.

What next?

  • That is a lot to take in! As you can see, setting up and trading through a limited company is a big responsibility, and nothing to be rushed into.
  • We’re happy to have a chat to discuss your options with you, so do get in touch if you think that would help you to make your decision.