Running a limited company in the United Kingdom is a popular business structure for entrepreneurs and small to medium enterprises (SMEs). It provides a legal framework that separates the identity of the business from its owners and offers a variety of operational, financial, and legal implications. While forming a limited company can offer significant advantages, it also entails certain responsibilities and drawbacks. This detailed overview explores the pros and cons of running a UK limited company in depth, extending beyond surface-level factors to provide a comprehensive understanding of what this business structure entails.
Advantages of Running a UK Limited Company
1. Limited Liability
One of the most compelling reasons to set up a limited company is the protection of personal assets through limited liability. In essence, the company is considered a separate legal entity from its owners (shareholders). This means that if the business incurs debts or faces legal action, the personal finances and assets of the owners are protected, provided no fraud or personal guarantees are involved. Shareholders are only liable for the amount they have invested in shares or guaranteed.
This limited liability acts as a financial safety net for entrepreneurs and investors, enabling them to pursue business ventures without risking personal bankruptcy due to company failure.
However be aware that the Companies Act / HMRC have strict rules when running a company and failure to comply can invalidate limited liability and cause many other issues, including having to repay dividends and penalties / back dated tax etc.
2. Tax Efficiency
Limited companies are subject to corporation tax, which is generally lower than the higher rates of income tax paid by sole traders and partnerships. Business owners can reduce their overall tax liability by paying themselves a combination of a lower salary and dividends, which are taxed at a lower rate than income.
In addition, certain business expenses can be offset against profits, reducing the overall tax burden. For example, companies can claim allowable expenses such as travel costs, office supplies, and salaries.
3. Professional Image and Credibility
Operating as a limited company can enhance the reputation of a business. It often gives clients, suppliers, and financial institutions more confidence in the business’s stability and professionalism. This perception can open doors to larger contracts and attract high-value clients who might prefer to work with an incorporated entity over a sole trader.
Many businesses and public-sector clients will only deal with limited companies, making incorporation a strategic move for growth and opportunity.
4. Access to Funding and Investment
Limited companies have more options when it comes to raising capital. They can issue shares to attract investment from individuals or venture capital firms. This ability to offer equity can significantly improve access to funding compared to unincorporated businesses.
Moreover, banks and lenders often consider limited companies more stable and credible, which can make it easier to secure loans and lines of credit.