If you are just setting out on the journey of establishing your new business it is very easy to set up a new limited company and become a director.

More business owners seem to be adopting the title of director of a limited company up from the start mainly because it is so cheap to form a company.

Many formation agents will charge less than £50 to set up a company.


Maybe you want to set up a limited company because of the perceived status of importance attached to a limited company or the importance that the title of director seems to have?

Right Choice?

Is a limited company the right choice for your circumstances?

Deciding on a business structure is one of the most frequently asked questions by any new start up.

There are several types of business set up, the main two types being:

  • Limited Company
  • Sole Trader (partnership if more than one person)

What does the structure mean?

A limited liability company means that your personal assets are protected if the business fails, unless of course you have given personal guarantees against any debts. The debts are limited to the company and not you as a shareholder.

With a sole trader business you are personally responsible for the debts of the business and your other assets e.g. your house could be used to settle the debts of the business.

Regulation and legislation

Regulation, legislation and control surrounding limited company status e.g. Companies Acts, filing accounts, registering the company etc are far more onerous than that of a sole trader business.

A sole trader is easier to operate with less formality.

In almost all circumstances the regulation and legislation surrounding a limited company means that an accountant is required to complete accounts, tax etc.

So make sure that you have sufficient funds available for the services of an accountant if you set up a limited company.


There is tax savings associated with operating as a limited company.

Profits from the limited company can be taken in the form of dividends and no national insurance is due on the dividends.

For a sole trader income tax and Class 2 and 4 national insurance will be due on the profits.

The savings depend upon your level of profit of course.

As you establish your business you may in fact be working elsewhere.

There may be costs incurred during the set up of the business that mean a loss is made in the first year(s).

Take this as an example.

Mrs D is setting up a business but will still be working whilst the business gets off the ground.

She needs to spent money on setting up a web site, stock, stationery etc and expects that she will make a loss in the first year of trading and move into profitability in the second year.

In this situation it may be worth starting the business as a sole trader as losses from the sole trader business can be offset against her income from her job.

So she may get a tax refund!

Worth thinking about?

So it may not be worth jumping straight into setting up a limited company from the outset.

Accounts and Reporting Requirements

For a sole trader the accounts and reporting requirements are very straight forward. All that is needed is a set of accounts and a self assessment self employment supplement each year.

As a limited company you will have a number of filing duties. Missing a filing deadline can result in heavy fines and penalties.

For a limited company the filing duties are:

  • Annual Statutory Accounts (full for HMRC and Abbreviated for Companies House)
  • Annual Return (different to the accounts – which not many seem to be aware of)
  • CT 600
  • Full P&L for HMRC
  • Self assessment for directors

In both cases you may have to file the following if you are vat registered or have employees.

  • PAYE – P35, P14s, P11d etc (if applicable)
  • VAT

With reporting requirements constantly changing, such as the introduction of iXBRL reporting from 1 April 2011, the help of an accountant is essential to make sure that you do not fall foul of the new requirements.

Limited Company Or Not?

Only you can decide which structure will suit your circumstances best.

However this may be something you would like to discuss with your accountant or business advisor at the start.

Make sure that you know what you are getting yourself into so that there are not any great surprises later.

Our guest blogger is Elaine Clark, Managing Director of Cheap Accounting and Accounting Partners with Clear Books. If you would like to become a guest blogger email lizzie@clearbooks.co.uk.

Posted by David Eaton

David is a Chartered Accountant and Director of SME Strategies (smestrategies.co.uk) which offers tailored support to ambitious SMEs and gives mentoring to owner managers.