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Should I run my business through a limited company?

There are pros and cons for doing business as a sole trader or in partnerhip on the one hand and through a limited company on the other. The advantages of being a sole trader or a non-limited partnership include:
> no registration or annual fees to pay
> no requirement to file returns or accounts at Companies House

The main disadvantage is the lack of limited liability. A sole trader or a partner in an unlimited partnership will be personally liable for all debts of the business.

Conversely the advantage of trading through a limited company is that the shareholders are not personally liable for the debts of the company, even if there is only one shareholder. Note however that in certain circumstances, company directors may be made personally liable for the debts of the company.

While accepting the need to file annual returns and accounts at Companies House, the advantages of trading through a limited company are considerable:
> limited liability
> shares and debentures can be issued in exchange for capital invested or lent
> tax advantages
> a company can offer a type of security for a loan known as a "floating charge" (see Finance and funding).

It is not possible to state categorically which medium is best as each case is different. However limited liability is an important consideration.

Regarding tax, it should be noted that for the tax year 2012/13, company profits up to £300,000 are taxed at 20% and dividends are not subject to National Insurance. Allowing for higher accountancy costs, this results in the company medium having the lower overall tax charge for a limited company provided annual profits exceed, approximately, £15,000.

In order to prevent persons gaining a tax advantage by setting up a limited company to provide their services in cases where there is no genuine self-employment, there are special rules relating to so-called “Managed Service Companies” and “IR 35” companies. It is possible to be both an employee in one employment and self-employed for other work. See: Tax.

You can also check this point by studying the information given on the HMRC site and, in case of doubt, get professional advice.

[Page updated: 1/08/2012]

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