Advantages and disadvantages of limited companies

Thinking about setting up a limited company in the UK? Choosing the right business structure is one of the most important early decisions you’ll make. It can affect everything from how much tax you pay to how protected you are from a liability perspective.

In this guide, we’ll break down some of the key advantages and disadvantages of limited companies to help you weigh the pros and cons. Whether you're a sole trader thinking about taking the next step, or starting your first business from scratch, this article will help you make an informed decision.

Plus, we’ll explain how Zempler Bank can support your decision – from registering your company to opening a business account, all in one place.

What is a limited company?

A limited company is a legal structure used to run a business in the UK. When you register as a limited company, your business becomes a separate legal entity from you. That means it can own assets, take on debt, and enter into contracts independently of its owners. It also means your personal liability is usually limited to the value of your investment in the company.

There are two main types of limited companies in the UK.

What is a private limited company (Ltd)?

A private limited company (aka an Ltd) is a UK business structure where the company is a separate legal entity, the owners have limited liability and shares are privately held (so they aren’t traded on the stock market).

This is a common structure for small businesses, freelancers and startups.

A private limited company:

• Is privately owned, meaning its shares are not traded on the stock market
• Must have at least one director and one shareholder (often the same person)
• Has to register with Companies House and file a range of documents, like annual accounts and confirmation statements
• Offers limited liability, protecting the personal assets of its owners.

Because of its flexibility, simplicity and protection, the Ltd structure is ideal for solo founders and small to medium sized businesses.

Note: there are other filing obligations to be aware of. What and when you need to file depends on your individual circumstances but an accountant can help you meet your obligations.

What is a public limited company (PLC)?

A public limited company (aka a PLC) is another type of limited company you may have heard of. A PLC is a UK business structure that allows a company to sell its shares to the public on a stock exchange and is subject to stricter regulatory and reporting requirements.

This type of structure is typically used by larger firms listed on the stock exchange.

This article focuses on private limited companies, which are commonly adopted by small businesses, freelancers and startups looking to grow.

Advantages of limited companies

Forming a limited company can bring certain advantages for you and your business.

1. Limited liability

One of the biggest benefits of a limited company is the limited liability it affords its owners. This means your personal finances are separate from your business finances. If the company runs into financial trouble, your personal assets like your house or car are usually protected.

This is a key advantage over operating as a sole trader, where you’re personally liable for all your business debts.

2. Tax efficiency

Limited companies can be more tax-efficient than sole traders. While sole traders pay income tax and National Insurance on their profits, limited companies pay corporation tax, which, depending on your personal circumstance, is usually lower.

You can also:

• Take a combination of salary and dividends, which may reduce your overall tax bill
• Potentially claim a wider range of allowable business expenses, depending on the industry you’re in

Tax rules can be complex, so it’s best to speak to an accountant to understand your options and find the most efficient setup.

3. Professional credibility

How customers view and judge your business isn’t just based on your reputation and marketing. Your business structure can send a strong signal too. Being a limited company can enhance your business’s reputation, making it appear more established and trustworthy. Clients, suppliers and investors often prefer to deal with incorporated businesses. It gives you a more professional brand presence.

4. Access to funding and investment

If access to funding and investment is critical to your business operations and growth, becoming a private limited company could be non-negotiable. As a limited company you’ll generally find it much easier to get funding from banks and investors because you can issue shares to raise capital, which sole traders can’t. These disclosure requirements – like filing annual accounts and publishing company information on Companies House – help provide the transparency that investors and lenders typically look for.

5. Business continuity

As a limited company is a separate legal entity, it continues to exist and can keep running even if the owners, directors or shareholders change. 

This stability is super important for building long-term relationships with clients, suppliers and investors. It also makes it easier to sell or transfer ownership of the business in the future, as shares can be reassigned without disrupting day-to-day operations.

As you can see, there are many advantages to becoming a private limited company. Being clear on what these are and if they’ll benefit your business will help you decide if a limited company is right for you.

If you’re ready to incorporate, Zempler Bank can support you through the process.

With our Formations service, you can register your limited business and apply for your new business bank account in minutes. We’ll even reward you with £100, subject to eligibility.

Disadvantages of limited companies

It’s not all sunshine and positives though. Alongside the advantages to registering as a limited company, there are potential disadvantages to think about too.

1. More admin and paperwork

Running a limited company comes with more admin than being a sole trader. You’ll need to:

• File annual accounts and tax returns
• Submit a confirmation statement to Companies House
• Keep accurate financial records

You may also need to hire an accountant to help with filings and tax returns, which adds to your costs.

2. Public disclosure requirements

Register as a private limited company and your business information – including financial statements and director details – will become publicly available on Companies House. This means you’ll have less privacy than a sole trader, whose business details aren’t public.

If you’re a new or young limited company, this may not be ideal for potential clients wanting to work with more established businesses. But once you’re established and have strong performance records, it can help make you a more attractive proposition.

3. Higher running costs

With the additional responsibilities a limited company brings – particularly around financial records and annual returns – many businesses rely on professional advisors like accountants, lawyers and financial experts to support them. Hiring an accountant, paying filing fees and keeping up with regulatory requirements can all increase your operating costs. This means limited companies often pay higher running costs than sole traders.

4. Less flexibility with income

Unlike sole traders, where you can withdraw profits freely, limited company directors can only take money from the business in specific ways – like a salary, dividends or loans. These payments can come with rules and tax implications.

Sole trader vs limited company: a quick comparison

When is the right time to register as a limited company?

There’s no one-size-fits-all answer to when’s the right time to register your limited company, but there are some common triggers:

• Your business income is growing and you're paying higher tax rates
• You want to limit your personal exposure
• You’re working with clients who prefer incorporated businesses
• You’re seeking investment or planning to scale

It’s a good idea to speak to a professional advisor like a lawyer or accountant to decide what’s right for your specific situation.

How Zempler Bank can help

Zempler Bank is here to support your small business every step of the way.

Get started with our Formations service

We make it simple to register your limited company and apply for a business bank account at the same time. Our digital-first approach means:

• Fast, hassle-free company registration
• Seamless account setup designed for micro and small businesses
• Great value 

Whether you're transitioning from sole trader to limited company or starting fresh, we’re ready to help you hit the ground running.

Learn more about our Formations service. 

Conclusion

Choosing to operate as a limited company comes with advantages and disadvantages. While you’ll enjoy benefits like limited liability, tax efficiency and professional credibility, you’ll also face more responsibilities, more paperwork, higher costs and public reporting requirements.

For many small business owners, the pros outweigh the cons. But every situation is unique and the decision you make should account for your individual circumstances.

Ready to take the next step? Register your company and apply for your business bank account with Zempler today.

Looking for more information? We’ve put together a guide on the key things you need to know about the process: Registering a limited business.