Is it better to operate a limited company or to be involved as a partner or as a sole trader?

There are many factors that you need to consider. Tax, risk, strategic and commercial issues, all need to be addressed before making your decision. The major advantages and disadvantages of a limited company are summarised below:

Advantages of a Limited Company

  • Limited Liability - owners are not liable for the company's debts. This is useful protection although funders such as banks often require personal guarantees.
  • Taxation - is lower when profits are very high - above say £40,000 pa
  • Income can be drawn from the company at lower tax/NIC rates.
  • Greater access to funds - use of a debenture may help the funders lend more.
  • Special schemes are available to attract investment into unquoted limited companies.
  • Perpetual succession/continuity - shareholders and directors may change but the company carries on.
  • Gradual hand-over of a business is easier to facilitate.

Disadvantages to Limited Companies

  • Costs of transfer - but there can be Tax advantages
  • Legal, regulatory and taxation requirements for incorporated businesses
  • Taxation - when profits having been rising in the period before the transfer, the Inland Revenue will issue revised demands for further tax and this must be funded.

Recent changes in company law has led to the removal of many legislative requirements. This has made it easier to run a small business as a limited company.

What are the commercial advantages?

  • To put in place the right structure to facilitate future growth, including a clear succession plan
  • To involve others in the business in a meaningful way
  • To generate significant tax savings now and into the future