What Are the Pros and Cons of Setting Up a Limited Company?

There are lots of different ways you can set up your business when you’re self-employed, all with their own positives and negatives depending on what’s going on with you. One of your options is to set up a limited company, but what does this actually mean? In this article we’ll go over what you need to know about running your own company.

If you’re not sure which road to take, it’s always worth taking financial or business advice so you can plan the best way forward.

What is a limited company?

A limited company is a type of business structure. Unlike some business structures, such as sole traders and partnerships, a limited company is an entity in its own right, so it’s legally separate from its owners. The company must register with Companies House and meet very specific regulatory and reporting requirements.

There are different types of limited company structure, although the two most common types are:

  • Private limited by shares (Ltd)
  • Public limited company (Plc)

What are the pros of setting up a limited company?

This largely depends on your own personal needs, but there are some aspects of forming a company which you might find particularly appealing. We’ll go over some of the most common ones next.


Limited liability

One of the key points to remember about a limited company is that, legally speaking, it’s totally separate to you as the person who owns and runs it. Everything you own belongs to you, and everything the company owes belongs to the business – including any debts.

So, if the company runs into financial problems or has debts it can’t pay, you won’t need to worry about selling any shiny things you personally own in order to bail it out. Sole traders don’t have this type of personal protection because there’s no legal distinction between them (the person) and them (the business).

It can make operating as a limited company quite an attractive idea, especially if you’ll be working in an industry which involves a high level of financial risk.

Accounting software for limited companies

Faster, simpler bookkeeping

Learn more


It might be more tax efficient

When a limited company makes a profit, it must then pay Corporation Tax. Depending on how much profit you make, this might be at a lower rate than the income tax you would pay as a sole trader or in a partnership. But remember, the company is separate to you, so you can’t just take any leftover money out of the business whenever you feel like it.

Instead, you might decide to pay yourself a salary as a company director; or take dividends; or a combination of the two. Lots of business owners use a combination to maximise their tax efficiency.

The company can claim tax relief on the salary it pays to you (so it won’t pay as much Corporation Tax). If you pitch it just right, neither you nor the company will incur income tax or National Insurance on the salary either.

So what about the dividends? As a shareholder you’re normally entitled to dividend payments from the company’s profits. These are exempt from National Insurance, and dividends are taxed at a lower rate than ordinary income too.


Professional status

Operating as a limited company can build the business’s credibility and reputation with clients, suppliers and financial institutions. It can also help stakeholders feel more confident that the business is serious and professionally managed.


Investment and funding opportunities

Limited companies can issue shares to raise capital. This can be a really important way of securing investment. They can also have better access to loans, grants, and other forms of funding compared to unincorporated businesses.



A limited company has its own legal identity, which means it can continue operating regardless of any changes in ownership or management. The company will still exist even if one of the shareholders or directors withdraws or passes away.


Ownership and control

Shareholders own the company, and they can appoint company directors to manage it. This separation of ownership and control can be beneficial for efficient management. Shares in a limited company can also be sold or transferred, making it easier for owners to leave.


Employee incentives

Limited companies can offer things like share schemes, benefits in kind and other incentives to help attract and retain the best talent.


A clearer legal framework

The legal structure and regulatory framework that limited companies have can provide a clear set of guidelines and protections. More rigid corporate governance standards can improve the overall management and accountability of the business too.


Pension benefits

Directors of limited companies can set up more advantageous pension schemes, potentially bringing about more tax-efficient retirement planning. Bear in mind though that as a limited company, if you take on any new employees you’ll need to know about things like auto-enrolment.

So, what are the cons?

We know there’s lots of advantages to setting up as a limited company. But there are some potentially big disadvantages that you’ll need to think about too. Like we said, it all depends on your circumstances!


More administration

Operating a limited company involves a significant amount of paperwork and compliance which can be complex. Directors must make sure they meet all statutory requirements, including filing annual accounts and confirmation statements with Companies House.

There’s a heavier amount of record-keeping required for limited companies too. Detailed records of income, transactions, expenses and other financial activities must be maintained, which can be time-consuming and sometimes pretty confusing. Hey, good accounting software features might not be very exciting, but they can save you rather a lot of time!



There are quite a few costs associated with incorporating a company, including registration fees. After that, you’ve got ongoing costs too. These can be more expensive with a limited company due to the need for professional services like accountants, solicitors and possibly auditors if the company reaches a certain size.


Public disclosure

Registering with Companies House as a limited company means that your information is automatically published to the online register where any random member of the public can have a poke about. It’s something to keep in mind if you’re uncomfortable with this level of transparency or don’t want your boss to know about your side hustle.



OK, so the tax regime for limited companies can be both positive and negative. Depending on your profits it might be more tax efficient, but it also means more work; Company Tax Returns, PAYE if you take a salary, Self Assessment to report any dividends, and so on.


Legal duties

Directors have legal duties and responsibilities under the Companies Act 2006. Failure to comply with these duties can lead to personal liability or disqualification from acting as a director. Directors must also act in the best interest of the company (which can sometimes go against personal interests!).


Less flexibility

Operating as a limited company can be less flexible compared to a sole trader or partnership because making changes to the company’s structure, such as issuing new shares or changing directors, also involves more formal procedures and filings.

There’s always the risk of disputes among shareholders too, impacting the company’s operations and decision-making processes.


Winding up

Closing a limited company can be more complex and expensive compared to winding down a sole proprietorship or partnership. Yep, because it’s a separate entity! You’ll need to follow formal liquidation or dissolution procedures.

Bookkeeping software helps your small business grow, by improving your cashflow and keeping track of expenses. This is where Pandle comes in! Create your free account today.

Rachael Anderson

A creative content writer specialising across business, finance and software topics. I have a love for all things writing, and creating engaging, easy to understand content that helps everyday people!

Notify of
Inline Feedbacks
View all comments