Why should I become a Limited Company?

Most people start off their own business as a Sole Trader because it is quicker and easier to get through the administration process.

There are pros and cons to becoming a limited company which we detail below to help you decide if a limited company is the right decision for your business.

It is not hard to understand that people are put off incorporating (become a Limited Company) by the extensive rules surrounding the process.

But as your business grows into the future, you should compare the benefits of becoming a limited company with your Sole Trader status, in order to maximise every financial benefit.

Limited Company Legal Identity

The legal identity of your company defines which rules apply to its financial affairs. These regulations have a direct impact on several key aspects of your business, which determines whether or not you should become a Limited Company.

Basic difference:

  • As a Sole Trader, you and your business are seen as one legal entity. You receive business profits as personal income and are fully liable for any and all business debts.
  • As a Limited Company, you and your business have two separate legal identities. You register the birth of your Limited Company with Companies House and it subsequently has a life of its own; with you as Director and shareholder.

Disadvantages of becoming a Limited Company

Let’s get the negative over with first.

This should be a carefully considered decision, so you need the full picture. There are some factors which may mean that incorporation is not the best choice for your specific business:

  • Additional paperwork – you will have to submit an annual Corporation Tax Return to HMRC and send annual Year End Accounts to Companies House. This does increase the number of hours you need your accountant.
  • In the role as company director, your registration information can be publicly accessed.
  • There are restrictions on what you can name a limited company.
  • It can be more difficult to withdraw money from a company, than a simple Sole Trader business.
  • If you decide to incorporate from the start of your business, it will cost you a bit more.
  • If you have previously been un-discharged bankrupt or disqualified as a director, then you cannot become director of another limited company.
  • A comprehensive list of responsibilities and legal duties awaits you as Company Director. See our Company Directors Guide to fill you in on the basics you need to get you started.

Advantages of being a Limited Company

There are three main benefits to incorporating your business: security of your personal assets, business reputation and more money in the bank.

Personal Security
When you have a Limited Company business, your personal assets are safe from being attached to any business disasters. If your business goes belly-up, your car, house and other personal items are secure. You only lose your initial investment.

This legal protection is only available to limited companies, not Sole Traders or business partnerships. If is only voided if you, as director, is proven to be involved in any illegal shenanigans.

Limited companies are regarded as more serious, established and committed than other types of business. Some larger companies will not work with Sole Traders at all.

Business-to-business work is seen as cleaner when all involved are limited companies. The details of National Insurance and PAYE can be avoided and everything is kept purely about the specific business transaction.

More money in the bank:

  • Tax efficiency – As a limited company, you can pay yourself a combo of dividends and salary. This means that you can keep your wage under the higher rate tax bracket and therefore reduce your income tax and National Insurance bill. This is not anything like large corporation’s large scale tax avoidance – it is legitimately choosing the most efficient tax system to suit your business.
  • Credit – the business has its own ability to borrow capital and lenders (for example, mortgage) are more inclined towards individuals that are a Company Director than a Sole Trader.
  • Investment – you can sell shares (equity) to raise money to reinvest in the business
  • Business expenses – by deducting your allowable business expenses from your taxable profits, you can reduce your Corporation Tax bill.
  • You can sever ties and sell the entire business, if and when your circumstances change.

Any small business owner, freelancer or contractor can gain a lot of benefits from becoming a limited company.

All the paperwork and different regulations can really be worth it however knowing what you have to do to get a company started and your obligations after incorporation is important to know.

Setting up a Limited Company

The first thing you need to do is register your business with Companies House – ‘incorporation’.

This can be done online or by post. You will then receive legal proof that your company exists in the form of a ‘Certificate of Incorporation’. This shows your unique company number and the date it was ‘born’.

You need to organise some particulars before you register for incorporation:

  • A company name and address.
  • Memorandum of Association – like a mission statement, this document is an agreement between the shareholders to create the company.
  • Statement of Legal Capital – who owns them and their worth.
  • Articles of Association – your company’s golden rules, how it is run.
  • A company director (at least one).
  • Combined Register – a list of all the company’s directors and everyone else that is part of operating the company.

You can use our how to set up a limited company guide to find out more about what you need to do and how to provide it to companies house correctly.

Directors and Shareholders

A limited company is run by ‘directors’ and owned by ‘shareholders’. The company itself has a separate legal identity and owns capital and assets. The director’s responsible for all the legal compliances and general management of the company’s affairs.

The shareholders have rights as the owners of the company and must be kept informed of its financial status. You may be the sole director, sole shareholder and sole employee.

Does my Limited Company need to be insured?

Limited companies are best served by three different types of insurance policy:

  1. Public Liability
    Protecting your company from claims arising from any damage or death to third parties and/or their property. This is a responsible move, not a legal requirement.
  2. Employers Liability
    This protects the company against any claims made by employees.
  3. Professional Indemnity
    This protects the company against any claims made that are questioning the quality of your work.

What taxes do I have to pay as a Limited Company?

There are three main areas of taxation that you need to be aware of; personal Income Tax, Corporation Tax and VAT.

Personal Income Tax

As Company director, you need to submit a Self Assessment tax return in order to tell HMRC how much you earned either as dividends or salary. The deadline for this is 31st January following the end of the tax year.

Corporation Tax

This is a tax on your company’s profits after you deduct running costs, but before any dividends. You must register your company to pay Corporation Tax within three months of opening your doors. It is a legal requirement that all limited companies pay this tax by submitting a CT600 every year.

Value Added Tax – VAT

This is a tax on most services, invoices and goods. Your annual turnover must be at a certain level before you are required to register to pay VAT. So you are not automatically registered for VAT alongside your Companies House registration.

HMRC also run a Flat Rate VAT scheme for business with a turnover that is no more than £150,000. This allows you to pay a flat rate percentage of your sales to HMRC and still charge your clients at the usual 20%.

Our guide to tax for company directors can help you work out what taxes are applicable to you as a company director.

Limited Company Banking and Payroll

Bank Account

By law, you must have a business bank account that is totally separate from your personal account and is backed up with impeccable record.

PAYE scheme

If you have any employees then you must become part of the PAYE system which collects income tax straight from staff wages. You must also organise the correct National Insurance Contributions for your staff. These are legal requirements and you can face hefty penalties if you are inaccurate.

Dividends and Salary

The company is the individual owner of any profits you make and, even if it is your company, you get income either through a salary or dividends. If you are also an employee, then you get a salary.

If you are the owner, then you get dividends. If you are both employee and owner then you can split you income between the two in order to pay the minimum tax requirement.


Obviously, this is crucial to your company getting paid – you ‘raise an invoice’ and present it to your clients with the expectation of payment.

But not just any old invoice format will do – there are rules to make it valid:

  • Your company name, registration number and address
  • Client’s name and address
  • Good description of the service or goods that have been provided by your company including an itemised list; rate VAT, unit price with and without VAT, total VAT charged and total payment due
  • Date the service or goods were supplied
  • A sequential invoice number
  • Must include the word ‘invoice’!

Depending on your needs, you might also include a place for bank details to determine how this is to be paid.


A favourite question …what can I claim for? HMRC has a very detailed list of which business expenses can be claimed for and each case is considered individually. The one thing that connects all allowable business expenses is that they are ‘wholly and exclusively’ for business purposes (HMRC’s own phrase).

The main difference between an expenses claim for a limited company and one within a Self Assessment tax return is that you do not simply get a sum refunded to you.

Your business expenses form part of the calculation which determines how much Corporation Tax you pay. So your taxable income, minus your allowable expenses, equals the amount of Corporation Tax you must pay.

As a Director what do I have to give to HMRC?

Well, there are a number of different forms to complete at different times of the year and we list the most common below:

  • Abbreviated Financial Accounts – an annual submission of the company accounts which includes all credits, debtors, cash and assets.
  • CT600, The Corporation Tax Return – the amount to pay is calculated by deducting tax allowances and expenses from the company’s income and applying the current rate.
  • P11D – This form is for declaring any business expenses or perks – benefits – that you personally receive.
  • Annual Return – This is basically a snapshot of your company’s financial position at a particular time every year.
  • P60 – If you are paid a salary by your company, then this form declares how much you are paid and how much tax was taken off.
  • Self Assessment Tax Return – If you are a director of a limited company then you must submit this form, concerning your finances as an individual taxpayer, every year.
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