In short: A limited company is a separate legal entity, so your personal assets are generally protected from business debts. It can also give you more options for how you pay yourself, makes it easier to bring in investors, and can look more established to clients. In return you take on more paperwork and public disclosure.
Choosing between working as a sole trader and setting up a limited company is one of the first decisions a founder makes. Both are valid. This guide sets out the main advantages of a limited company and the trade-offs, so you can decide what fits.
1. Limited liability
A limited company is a separate legal person. It owns its assets, signs its own contracts and owes its own debts. If the business fails, shareholders usually only lose what they paid for their shares.
As a sole trader there is no separation: you are personally responsible for every business debt.
Limited liability has limits. Directors can be personally liable for wrongful or fraudulent trading, and any personal guarantee you sign for a loan or lease makes you responsible for that debt.
2. Tax options
A company pays Corporation Tax on its profits, not Income Tax. For financial years from April 2023, the rates are:
- 19% small profits rate on profits of £50,000 or less
- 25% main rate on profits over £250,000
- marginal relief for profits between those two figures
These limits are reduced for short accounting periods and if you have associated companies.
As a director and shareholder you can usually take money out through a mix of salary and dividends, and the company can make pension contributions. Whether this saves tax compared with self-employment depends on your profits, your other income and current tax rates, so ask an accountant to run the numbers before you decide.
3. Credibility with clients and suppliers
Some larger clients, public bodies and agencies prefer, or even require, suppliers to trade through a limited company. "Ltd" after your name and a company number on your invoices can make a small business look more established.
4. Name protection
Once your company is registered, no one else can register an identical company name at Companies House. A sole trader's business name has no such protection. A trade mark gives wider protection, but registering the company is a useful first step. Use our free name check to see if your name is available.
5. Easier to raise investment and share ownership
A company can issue shares. That makes it simple to:
- bring in a co-founder with a clear percentage
- sell shares to investors
- give shares to key staff
- pass on ownership, or sell the business later
6. The business can continue
A company does not end if a shareholder leaves or dies. Shares can be transferred and new directors appointed, so the business carries on.
7. Anyone can own one
Directors and shareholders can live anywhere in the world. You need at least one director, who must be a person aged 16 or over, and a registered office address in the same UK nation as the company. See our Non-Resident Package if you live outside the UK.
The trade-offs
A limited company also brings duties:
- More filing. Annual accounts, a Company Tax Return and a confirmation statement at least once every 12 months.
- Public information. Your name, month and year of birth, service address and the company's accounts appear on the public register.
- Identity verification. Every director and person with significant control must verify their identity with Companies House.
- Director duties. You must act in the company's interests and keep proper records.
- Accountancy costs. Most companies use an accountant.
Typical timeline after you incorporate
- Register for Corporation Tax within 3 months of starting to trade.
- Open a business bank account in the company's name.
- File your first confirmation statement within 12 months.
- File your first accounts within 21 months of incorporation, then 9 months after each year end.
How Form My Company can help
Our Digital Package costs £290, including the £100 Companies House fee and VAT, and covers incorporation and Corporation Tax registration. As a Companies House ACSP, we verify your identity for you as part of the order. Want your home address kept off the public register? The Privacy Package at £1,000 adds a registered office and director service address for the first year. Not sure which to choose? Compare packages side by side.
Frequently asked questions
Is a limited company better than being a sole trader?
Not always. A company gives limited liability and more options, but has more paperwork. The right choice depends on your profits, risk and plans.
What Corporation Tax rate will my company pay?
19% on profits up to £50,000, 25% on profits over £250,000, with marginal relief in between. The limits are reduced for short periods and associated companies.
Am I personally liable for my company's debts?
Usually not, but you can be if you sign a personal guarantee or are found to have traded wrongfully or fraudulently.
Can I form a UK company if I live abroad?
Yes. Directors and shareholders can live anywhere, but the company needs a UK registered office address in the right UK nation.