Accounting – 5.3 Limited companies | e-Consult

Operating as a limited company offers several advantages and disadvantages compared to sole trader or partnership status. The key advantages revolve around limited liability, which is a significant benefit. Limited liability means that the personal assets of the owners (shareholders) are protected from business debts. If the company incurs debts, the shareholders are only liable up to the amount they invested in the company's shares. This encourages investment and risk-taking.

Furthermore, limited companies find it easier to raise finance. They can issue shares to the public or seek loans from banks, as the limited liability structure provides a greater level of security for lenders. This access to capital allows for expansion and growth. Limited companies also offer a more structured and professional image, which can be beneficial for attracting customers and suppliers. Finally, ownership is easily transferable through the sale of shares.

However, there are also disadvantages. The main disadvantage is the increased complexity and cost of setting up and running a limited company. There are more legal and administrative requirements, including Companies House filings and annual accounts submission. This can be time-consuming and expensive.

Limited companies also face greater scrutiny and regulation. They are required to adhere to stricter accounting standards and reporting requirements. This can be burdensome, particularly for smaller companies. Furthermore, profits are taxed at a higher rate than with sole trader status, as corporation tax is levied on company profits. Finally, the separation of ownership and control can sometimes lead to conflicts of interest between shareholders and managers.