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Should you set up a limited company?

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If you have been drinking from a cup of ambition and decided to set up a new business one of the most important decisions you will have to make is whether to become self-employed or to set up a limited company for your business.

Whether your new business is a coffee shop, blog, side hustle or something else there will be tax and legal implications that need to be considered.


A big advantage of setting up a limited company is that it will pay less tax than if you were self-employed. A company is subject to Corporation Tax and currently pays 19% tax on its profits. This is lower than the current rate of 20% that basic rate taxpayers have to pay in the UK if they are self-employed.

As a director and shareholder of a limited company, you can take a small salary and pay yourself dividends. This is another advantage as dividends unlike salaries do not attract National Insurance deductions and are not subject to Paye As You Earn.

Limited companies do have to pay tax on their profits at 19% even if their profits are fairly small. This is different from being self-employed as everyone in the UK has a tax-free Personal Allowance which in 2020/21 was £12,500. If you do not expect to make above this in a year then it is more tax advantageous for you to be self-employed.

If you set up a limited company, you will need to submit a corporation tax return to HMRC whilst as someone who is self-employed you would need to submit a self-assessment return to HMRC. Both, therefore, require you to submit tax returns showing your income and expenses allowing HMRC to calculate how much tax you need to pay.

Separate Legal Entity

A limited company is a totally separate legal entity from its shareholders. Someone who is self-employed is treated as the same entity for legal purposes. If you set up a company and something goes wrong then it is the company who is sued not you personally so it is unlikely you will lose your house and other assets. However, if you were self-employed and you were sued then you could lose those assets.

If your limited company is fairly new or small then banks and other lenders may insist on you providing them with personal guarantees which negates this benefit as these mean your personal assets are at risk.

Professional status

If you set up a limited company this can appear more professional to many people and some prefer to deal with companies rather than someone who is self-employed. Some people also enjoy saying they are a director or own a company which helps to boost their self-esteem sometimes.

Whilst there may be lots of self-employed people using the same name every single limited company has to have a different name. You can easily check at Companies House the name of companies in use.

Anyone can look up Companies House which means you have less privacy than someone who is self-employed as your latest accounts and details of the directors and shareholders can be found quickly by anyone. This provides suppliers and finance companies with the information which they can use to rate the creditworthiness of your company. This is not the case if you are self-employed as your accounts are only seen by HMRC and anyone with who you choose to share them.


A limited company can have different types of shares with different rights. If you and your partner were the only 2 shareholders you could have ‘A’ shares and they could have ‘B’ shares. This would allow you to issue different dividends to the different types of shareholders for tax reasons.

If late on you decide to sell all your business or just part of your business you can simply sell some of the shares to the interested party. If you go down this route it may be worthwhile setting up a Shareholders’ Agreement which outlines the various rights and responsibilities of the different shareholders such as selling them without the other shareholders’ consent or not doing something in the company’s best interests.


Some people prefer to be self-employed rather than to trade as a limited company as the start-up costs are cheaper and deemed to be less hassle. However, anyone can set up a limited company at Companies House for only £12. The process is fairly straightforward and can be completed quickly allowing you to choose your company name, directors, and shareholders.

If you are happy doing this yourself it will certainly save you a bit of money compared to using a lawyer or an accountant to set a company up for you.

Accountants are more likely to charge more for preparing the accounts of a limited company rather than a sole trader as the accounts need to comply with the Companies Act which means they require more disclosure and information than is needed under self-assessment.


Another advantage of setting up a limited company over being self-employed is that a company can claim pension contributions as a tax-deductible expense. This allows you to save for your retirement in a more tax efficient method than had you been self-employed.

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