Advantages and disadvantages of a limited company

Its no secret, if you are thinking of becoming a contractor, working through a limited company is the most tax efficient way of trading – any accountant will tell you that.

If you are considering becoming a contractor and are thinking about trading through your own limited company, read our free guide below to understand the key advantages and disadvantages a limited company. We’ll cover the financial implications, administration duties and much more.

Advantages of a limited company

Higher take home pay

As we touched on in the opening paragraph, a limited company is the most tax efficient way of trading. In general, you can expect to take home 75% to 80% of your income, other structures such as umbrella companies tend to provide you with around 60%, so it isn’t difficult to see why so many contractors lean towards going limited from a financial perspective.

Ability to claim a greater range of expenses

Limited companies are able to claim a far greater number of expenses compared to other company structures. As a general rule of thumb, anything that is wholly and exclusively for the use of business purposes can be claimed as an expense.

These expenses can then be offset against your company profits to reduce your tax bill. As a result, it is in your best interests to understand what expenses you can claim and our accountants are always on hand to help. We have even put together a jargon-free guide to limited company expenses that you may find useful.

You are separate to the business

Hopefully this is something that won’t ever be relevant to you, but it is important to know. As a limited company owner, you have what is known as “limited liability.” This means that should the business not be able to keep up to date with debt repayments, you aren’t personally liable.

If a debt is in your company’s name, your personal assets cannot be seized. However if you were to trade as a sole trader, you would have “unlimited liability” and your personal assets could be seized.

You can register for the flat rate VAT scheme

If you aren’t familiar with the flat rate VAT scheme, we have a useful guide that is well worth a read, so make sure you head over to the resources section.

As a quick overview, the flat rate scheme allows those who are registered to charge VAT at the standard rate of 20% (as of 2014) and pay it back to HMRC at a reduced rate, so you can actually profit from being VAT registered.

Greater opportunity for tax planning

Limited companies have far greater tax planning opportunities than if you were to contract through a umbrella company or work as a sole trader. Our accountants will be able to discuss the tax planning opportunities available in far greater detail, so if you want to find out more, feel free to call our team and we will be happy to help.

You can appear more professional

Many companies, particularly larger corporations, prefer to only deal with limited companies – working with a limited company provides them with a sense of confidence.

When you take this into account, if you are going to be working with larger companies, it is well worth working through a limited company.

Disadvantages of a limited company

You’ll need to keep on top of paperwork

You’ll need to keep all receipts of any expenses that you incur and each month you’ll have a few administration duties to complete, no more that 15 to 20 minutes per month. When you consider the financial benefits that come with limited company ownership, it won’t be hard for you to motivate yourself to find those few minutes each month.

Not ideal for short-term contracts

If you only plan on contracting for a few months, a limited company may not be the right route for you. You will still need to file accounts at the end of the year even if you have only been trading for part of it. Once you consider the cost of your accountancy fees for the year, it might be more beneficial for you to consider the umbrella company route.

Only beneficial if you are earning over £25,000

The general rule is that if you aren’t earning in excess of £25,000 per annum, you won’t be able to take full advantage of the tax planning benefits that make the limited company route so appealing.

We are experts in contractor accountancy, so if you have any further questions with regard to contracting through a limited company or would like to find out more about our fixed-fee package for just £55, call us on 020 7481 4743

You might also find the following pages of use: