Understanding the Advantages and Disadvantages of A Limited Company

If you work as a contractor, the most tax efficient way to operate is through Limited Company. Limited Company is a legal entity that is independent of its officers. Simply put, a Limited Company has its own assets, liabilities, profits, and losses. Owners of such company are protected from financial liability if ever it encounters difficulty in the future.

Limited Companies need an accountant and more administration works compared to the Umbrella Company. With this, some contractors who do not want to deal with much paperwork are contracting for a short period of time. These contractors prefer Umbrella Company as it presents a hassle-free way of contracting. Despite the hassle-free way of contracting, you should not dismiss how a Limited Company can help you.

IR35 contracting

Advantages of a Limited Company
As mentioned earlier, a Limited Company is the most tax efficient way to operate compared to Umbrella Company. This is because Limited Company contractors take a small salary and withdraw the remaining of the income in the form of dividends. The National Insurance contributions are not payable on company dividends. Aside from being tax efficient, here are other advantages of a Limited Company:
• As a director, you are in complete control of all company affairs – financial and

administrative. If things go wrong, you have limited personal liability.
• You can also create share classes. This is important for tax planning purposes, attracting investors and dividing ownership.
• Owners of Limited Company can decide how they compensate themselves whether to draw income from the company or split between salary and dividends.
• Since a Limited Company is a legal entity, it can be passed on or sold with ease and convenience.
• If you decide to sell the company and you have accumulated funds or shares for a year or more, you can benefit from Entrepreneur’s Relief Scheme. In this scheme, you only pay 10% in CGT (Capital Gains Tax) share sale proceeds.

Disadvantages of a Limited Company
It was also mentioned earlier that Limited Company involves more administration work compared to Umbrella Company. Aside from that, here are other disadvantages of a Limited Company:
• You have to know that running a Limited Company involves costs like company filing

fees, stationery, accountancy costs, legal costs and administration costs.
• Every year, your company will need to file Annual Accounts with Companies House and HMRC (Her Majesty’s Revenue and Customs). On top of that, you also need to complete a Confirmation Statement, which is previously known as the Annual Return.
• As a director, you are responsible for making sure that accounts are prepared accurately and are submitted on time. Although these tasks are performed by your accountant.
• If you want to provide contract services, IR35 legislation would apply if you haven’t taken enough action to comply. Remember that the consequences of being caught by IR35 are great.
• If you are thinking about taking a short-term contract, Limited Company is not suitable.

If in this case, you want to set up as a Limited Company contractor, you need to fully understand everything before you even get started.


About the author: Jack


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