The advantages of setting up a limited company, also called an LLC, include the ability to separate legal identities, allow complex forms of ownership, claim a broader range of expenses, and enjoy more flexible tax planning. In fact, there are many reasons you may want to consider setting up a limited company.

Advantages of a Limited Company

The main benefits of owning a limited company include:

  • Separate legal identity: limited companies exist separately from their owners and managers
  • Allowance for complex ownership forms: you can set up your limited company however you see fit
  • Higher take-home pay: limited company owners can take home up to 80 percent of pay by working at their own business
  • Ability to claim a wider range of expenses: anything classed as a business expense can be claimed for tax purposes
  • Personal asset protections: limited company owners are not personally liable for company debts
  • Complete business control: owners maintain control of all financial matters
  • Ease of use: limited companies are easy to set up and manage
  • Tax planning opportunities: limited companies enjoy a wider range of tax allowances and tax-deductible costs than other companies
  • Credibility: LLCs inspire confidence in customers, vendors, and suppliers because they are considered more legitimate than sole proprietorships or partnerships
  • Company name protection: limited company names are registered with the state and protected by law
  • Less paperwork: LLCs are more flexible in paperwork requirements than corporations
  • Ability to sell: it's easy to sell a limited company with all its assets and client lists

Keep in mind, however, that limited liability never extends to fraudulent activities. LLC owners have a duty to avoid incurring liabilities on purpose if they know the company cannot pay.

Since the IRS doesn't consider LLCs to be distinct entities for tax reasons, you can choose how your limited company is taxed. One option is for single-member LLCs to be taxed as sole proprietorships. All profits or losses are reported on the single member's personal tax returns.

Multimember LLCs may choose to be taxed as partnerships, meaning that each member reports their share of the profits and losses on their own tax returns.

Disadvantages of a Limited Company

Despite their many advantages, limited companies do have some drawbacks. For starters, there's a certain amount of paperwork involved, although it isn't much. In most cases, you'll be required to perform 10 to 15 minutes of administrative work per month. You must also file accounts annually for the public record, although an accountant can help with this task.

If you plan on operating your business for a short amount of time, setting up a limited company will be costly. It's best to register an LLC if you know you'll stay in operation for longer than a few months.

While LLCs offer numerous tax benefits, there is the issue of self-employment taxes. Unless you elect to be taxed as a corporation, you must subject yourself to the high self-employment tax rate. The trade-off, however, is that LLCs are not taxed twice at both the corporate level and personal level, so you may come out ahead. Remember that all LLC members are responsible for their own Social Security and Medicare taxes.

In some cases, members might be confused about their roles in a limited company. Since LLCs don't require specific roles like directors, officers, and managers, it can be difficult to know who's in charge unless you specifically outline everyone's role in the operating agreement.

Unlike corporations, LLCs have a limited life span. If a member departs the company or dies, the limited company ceases to exist. By contrast, a corporation continues to exist regardless of shareholder comings and goings. You can, however, combat this issue in the operating agreement.

How to Set Up a Limited Company

To form an LLC, choose a name and register it with the secretary of state. Complete all documents that your state requires to form an LLC, and submit them electronically or via mail and pay the appropriate fines. You'll need to define how the company will be managed and who will serve as the registered agent.

If in doubt, hire an accountant to save you the stress of completing your taxes and remembering tax deadlines.

If you need additional help setting up a limited company, post your job on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Stripe, and Twilio.