Limited Company Advantages and Disadvantages in UK [2025 Guide]

What is a limited company?

A limited company is a separate legal entity. It can own property, enter contracts, and employ people in its own name.

A company must be registered with Companies House and file its accounts and tax returns annually with HMRC. Clearly, a company can’t make decisions about the business itself and so Directors are appointed and they’re responsible for running the business, and making profits for the shareholders, as well as making sure all aspects of Company Law are applied.

Limited Company Advantages

1. Limited Liability Protection

One of the primary benefits of a limited company is the protection it offers to its shareholders. Personal assets are typically not at risk if the company faces financial difficulties, as liabilities are limited to the amount invested in the company.​

2. Tax Efficiency

Limited companies often benefit from more favorable tax rates compared to sole traders. With Corporation Tax rates ranging from 19% to 25%, and the ability to pay dividends, company directors can implement tax-efficient remuneration strategies. Additionally, companies can claim a broader range of allowable expenses.​

3. Professional Image and Credibility

Operating as a limited company can enhance your business's credibility. Clients and suppliers may perceive limited companies as more established and trustworthy, potentially leading to increased business opportunities.​

4. Easier Access to Funding

Limited companies may find it easier to secure funding through loans or investment. The ability to issue shares can attract investors, and lenders often view limited companies as lower-risk compared to sole traders.​

5. Perpetual Succession

A limited company continues to exist even if ownership changes. This continuity can be advantageous for long-term planning and succession.​

6. Pension Contributions

Company directors can make pension contributions through the business, which are tax-deductible expenses, aiding in retirement planning while reducing taxable profits.​

Limited Company Disadvantages

1. Increased Administrative Responsibilities

Running a limited company involves more administrative tasks, including annual accounts, confirmation statements, and Corporation Tax returns. Compliance with Companies House and HMRC requirements is mandatory.​

2. Public Disclosure of Information

Company information, including financial statements and director details, is publicly available via Companies House, potentially reducing privacy.​

3. Costs of Compliance

Operating a limited company can incur higher costs due to accounting fees, legal advice, and other compliance-related expenses.​

4. Profit Extraction Complexity

Withdrawing profits from a limited company requires careful planning. Directors must decide between salaries and dividends, each with different tax implications.

To properly understand the advantages and disadvantages of a limited company structure we first need to understand what a sole trader is and how a sole trader is taxed – so that we have something to compare it to!

What is a sole trader?

A sole trader is a self-employed individual who runs their business in a personal capacity. There is no legal separation between the business and the owner.

Key features:

• Fewer startup costs
• Simplified tax and admin
• Full personal liability for debts

There’s no need to formally register a sole trader business and the administration of a sole trade is generally simpler than running a business through a limited company (note: a property portfolio held in an individual’s personal name will be treated similarly to the sole trader business model, but the profits will be calculated using the property business tax rules, not income tax rules, more about registering limited company as a landlord, can be found here).

How is a sole trader taxed?

A sole trader is taxed on their taxable profit. They’ll pay Income Tax and Class 4 National Insurance Contributions (NICs). The rates of Income Tax and Class 4 payable vary depending on the level of profits made and change often – so it is always worth checking the latest rates on HMRC’s website. A sole trader will also pay Class 2 National Insurance Contributions.

Be aware that sole traders are taxed on all of the profit of their trade – regardless of how much they use for their own personal use. If the profit is £100,000 after allowable business expenses – the sole trader will be taxed on £100,000.

Key advantages of being a sole trader

• It’s easier to set up as a sole trader and there’s normally less administration. This is an advantage in itself, but it also has the added bonus of saving professional costs over the lifetime of the business. 
• A sole trader doesn’t have to answer to their shareholders and to its articles of association. This means there’s more flexibility in how things are run and you have full control over the business.
• All the profit is yours! You don’t need to consider any kind of remuneration strategy as all of the profit will already have been taxed at your marginal rate of tax.

Key disadvantages of being a sole trader

• Lack of limited liability. Your business isn’t recognised as a separate legal entity so any business debts or liabilities are also yours. As liability is unlimited, this means that your personal assets, such as your home, are at risk.
• It offers less opportunity for tax planning. It’s trickier to plan tax efficient strategies and it’s often harder to sell the business or plan for succession.
• There’s a lack of prestige attached to sole traders and some customers, usually larger businesses, won’t do business with sole traders.

Limited Company vs Sole Trader: A 2025 Comparison

Choosing between operating as a sole trader or forming a limited company is a pivotal decision for UK entrepreneurs. Each structure has distinct implications for taxation, liability, administrative responsibilities, and growth potential.​

Comparison Table: Sole Trader vs Limited Company

For a more detailed breakdown, consider checking out the Sole Trader vs Limited Company guide to get clearer information and choose the best option for your needs.

To get a clearer understanding of the advantages and disadvantages of limited companies, we’ve prepared two case studies – one looking at a property business and another looking at a trading business.

Property Business Going Limited – Case Study

I Love Properties Ltd is a limited company that specialises in renting flats in London. Let's explore the advantages and disadvantages faced by I Love Properties Ltd:

Advantages

Asset Protection: The value of the property portfolio is high; therefore the owners are grateful for the limited liability that the company affords them.

Tax efficiency: The company has been able to save a significant amount of tax through being able to deduct the mortgage finance interest in full. It has also saved a large amount of Capital Gains Tax on disposals of properties over the years. This is because companies historically paid tax at 19% while individuals paid Capital Gains Tax at 28% on residential properties.

Capital raising: I Love Properties Ltd has brought in private equity finance through the issue of additional shares. This raised a large amount of capital that they used to buy a factory and warehouse.

I Love Properties Ltd used to operate as a sole trader and chose to register their company with ANNA’s company registration service. They received an instant ANNA business account, with accounting software and NRLA membership worth £85 a year. This meant that all their business finances were covered from the very beginning and they were able to stay compliant with HMRC and Companies House.

Disadvantages

Administrative requirements: The company has incurred significant amounts of professional fees to deal with the additional admin costs of operating a property business through a limited company.

Mortgage Options: The company has often been quoted higher mortgage rates than the owners would have got as individuals.

Startup Business Going Limited – Case Study

Researching the Future Ltd is a high-tech limited company specialising in developing innovative software to solve problems of the future. They have ambitions to one day develop into a Public Limited Company – all it takes is one major innovation and they could be there!

Advantages for a startup to go limited

Limited liability: There’s a lot of risk in a business such as this; ideas are only great if they result in a sellable product at the end. If they don’t then the business has a lot of costs and makes a lot of losses. While the owners wholeheartedly believe in the business; they’re glad their personal assets are protected.

Tax Planning: Researching the Future Ltd has been able to take advantage of the generous Research and Development Tax relief over the years. This has resulted in vital tax savings for the company. To make sure the company is saving the maximum amount of money on taxes, they have an ANNA business account and +Taxes software. All the company directors and employees who make purchases for the company have ANNA cards and all expenses are categorised automatically. Everytime the card is used, the user is reminded to take a picture of the receipt, so there are no missing receipts and the company can claim as much tax back as possible. All the company bank accounts are connected to ANNA so all transactions are being also automatically recorded. The company director can file their VAT Return to HMRC directly from the ANNA app. At the end of the accounting period everything is ready for Corporation Tax filing – with no need to look for the shoe box full of receipts.

Professionalism: The owners believe that they have had more opportunity to pitch their ideas and bring investors onboard because they’re a limited company. They believe this has given them more credibility and an air of professionalism.

Disadvantages for a startup to go limited

Public discourse: The company’s financial information and director details are available to the public. There’s a risk that business details are being exposed to competitors.

Administrative costs: Significant amounts of money have been spent on professional advisers to make sure the company complies with all regulatory and industry-specific regulations. The owners suspect they have sometimes been charged more than a sole trader would have been – because they’re seen as an established company.

Legal considerations and regulations

There are a number of legal considerations and regulations to think about when you operate a limited company. This can either be seen as an advantage or a disadvantage – depending on the value you give to the initiatives.

Corporate governance

There are a range of different corporate governance standards that your company needs to stick to. For example, the requirement to file a confirmation statement every year at Companies House – or the requirement to have a policy on Corporate Criminal Offence. There can be stiff penalties for not complying fully with your corporate governance requirements.

Tax laws and regulations

The tax laws that apply to limited companies are complex and there are lots of legal obligations and deadlines that need to be met. Getting it wrong can lead to large financial penalties – and even criminal prosecution of the company’s directors in the very worst cases. ANNA can help you to stay compliant and make sure you don’t miss any important deadlines. We help make it easy to calculate and file your taxes.

Depending on what your business is; you might find that there are specific regulations for your industry that limited companies must stick to. These may relate to things like licensing, permits and intellectual property rights for example.

Is It Worth Going Limited Company?

Determining whether it's worth going limited company depends on various factors, including income level, business growth plans, and risk exposure. Generally, if your profits exceed £50,000 annually, the tax benefits and limited liability protection can outweigh the additional administrative responsibilities.​

To sum up

Choosing between operating as a sole trader or forming a limited company is a significant decision with long-term implications. While a limited company offers benefits like limited liability, tax efficiency, and enhanced credibility, it also comes with increased administrative responsibilities and costs. Assessing your business goals, financial situation, and risk tolerance is crucial in making the right choice.

Ultimately, when looking at what structure is right for you, it’s important that you consider all these factors before you make a decision. As well as thinking about the specific needs of your business and industry, also consider your personal goals for your business – and your life.

It is always easier to go through all the tricky bureaucracy with someone who understands the market and knows the rules. 

Registering your business with ANNA you get full support with a business account, accounting and tax filing – and becoming a part of our small business community. We’re available 24/7 from our office, ready to answer your questions.

Note: This article was written based on the tax rules currently in place in the UK. Upcoming events, such as Finance Acts, could change the situations described below. Because of that, nothing in this article should be considered advice. If you have any doubts or questions about limited companies, you can always speak to one of ANNA’s tax advisers or use our instant chat tax support.