7 Reasons to Set Up a Limited Company and 7 Reasons Not To: A Definitive Guide

With over 20 years in the accounting and tax advisory field, I’ve encountered a recurring question from clients: whether to set up a limited company or not. In my practice, we work with limited companies daily and have seen firsthand their numerous advantages as business structures. However, it’s clear that limited companies aren’t the ideal choice for everyone. To provide clarity on this matter, this article outlines seven compelling reasons to set up a limited company, and equally, seven reasons why it might not be the best choice for your business needs.

7 Reasons to Set Up a Limited Company

1. Limited Liability:
   One of the primary benefits of a limited company is the protection it offers through limited liability. This means that the personal assets of the shareholders are protected, as they are only responsible for company debts up to the value of their shares. This separation between personal and business finances provides significant peace of mind for business owners, reducing personal risk in the event of financial difficulties or legal disputes.
   

2. Multiple Shareholders/Business Partners and Attracting Investors:
   A limited company structure is conducive to bringing in multiple shareholders or business partners, which can be crucial for growth and diversification. It also makes the company more attractive to potential investors, as it allows for clear equity distribution and investment. This can open doors to new capital, expertise, and networks, driving business expansion and innovation.
   

3. Tax Planning:
   Limited companies in Ireland often benefit from more favourable tax treatment than sole traders or partnerships. The corporation tax rate is typically lower than the personal income tax rate, which can lead to significant tax savings. Additionally, companies can avail of various tax-deductible expenses and allowances, aiding in efficient tax planning and management.
   

4. Pension Planning:
   Directors of limited companies have advantageous options for pension planning. Company contributions to pension schemes can be higher than those for sole traders, and these contributions are often tax-deductible for the company. This allows for more effective retirement planning, providing a significant financial advantage for business owners.
   

5. Professional Image:
   Operating as a limited company can enhance your business's professional image. This structure is often associated with a level of seriousness and credibility that may not be ascribed to sole traders or partnerships. A professional image can help in building trust with clients, suppliers, and investors, which is crucial for business growth and stability.
   

6. Access to Funding:
   Limited companies typically find it easier to access funding, including loans, grants, and investment capital. Lenders and investors often prefer the structured and regulated nature of limited companies, which can offer more security and transparency. This can be vital for businesses looking to expand or invest in new projects.
   

7. Succession Planning:
   A limited company facilitates easier succession planning. Ownership can be transferred through the sale of shares, making it simpler to pass the business to a family member or sell it. This provides a clear path for future transitions, ensuring business continuity and stability.

7 Reasons Not to Set Up a Limited Company:

1. Cost:
   Setting up and maintaining a limited company in Ireland can be more expensive than operating as a sole trader or partnership. The costs include registration fees, annual filing fees, and the potential need for professional accounting and legal services. These ongoing expenses can be significant, particularly for small or new businesses.
   

2. Compliance:
   Limited companies face stringent compliance requirements, including the need to file annual returns with the Companies Registration Office (CRO) and adhere to specific accounting standards. This regulatory burden can be challenging, requiring time and resources that small business owners may not have readily available.
   

3. Time:
   The additional compliance and administrative responsibilities of running a limited company can be time-consuming. This includes preparing and filing annual accounts, holding annual meetings, and maintaining company records. This time investment can detract from focusing on the core activities of the business.
   

4. Income Below €100,000:
   For individuals with an annual income below €100,000, the costs and complexities of a limited company may not justify the potential tax benefits. In such cases, operating as a sole trader or in a partnership can be more advantageous and less burdensome.
   

5. Loss of Personal Control:
   Shareholders in a limited company may have to compromise on personal control. Decisions may require consensus or voting, which can lead to conflicts and slow down decision-making processes. This can be particularly challenging for owners used to having complete control in sole proprietorships or partnerships. A notable example is Steve Jobs being ousted from Apple, highlighting how decision-making can be diluted in a limited company.
   

6. Director's Responsibilities:
   Directors of limited companies have increased legal and financial responsibilities. They must ensure the company complies with the law, manage company finances responsibly, and act in the best interest of the company. Failure to fulfil these duties can lead to legal consequences, adding an extra layer of responsibility and risk.
   

7. Financial Disclosure:
   Limited companies are required to disclose certain financial information to the public, including annual accounts. This lack of financial privacy can be a deterrent for some business owners who prefer to keep their financial affairs private.