Why You Should NOT Start an LTD in 2026! - The Disadvantages of Starting a Limited Company

21st January 2026

For many years, forming a limited company was seen as the default route for entrepreneurs, freelancers, and contractors seeking tax efficiency and professional credibility. However, by 2026 the landscape has changed significantly. While incorporation can still offer advantages in certain circumstances, there are now clear disadvantages that prospective business owners must weigh carefully before choosing this structure.

Higher and more complex taxation

One of the most significant changes affecting limited companies is the increase in corporation tax. Profits above £250,000 are taxed at 25 per cent, with a complex marginal rate applying between £50,000 and £250,000. Although smaller companies continue to pay 19 per cent, the overall tax system has become more complicated and less generous.

In addition, limited company owners face double taxation. Profits are first taxed at the company level and then taxed again when money is taken out as dividends or salary. With dividend tax rates rising and the dividend allowance reduced to a minimal level, many directors now find that the tax savings once associated with incorporation have largely disappeared, particularly for modest profit levels.

Increased administrative burden

Running a limited company involves substantially more administration than operating as a sole trader. Directors must prepare annual statutory accounts, file corporation tax returns, submit confirmation statements, and comply with payroll reporting requirements even if they are the only employee.

In practice, this complexity means that most small limited companies rely on professional accountants, adding ongoing costs. For new or low-margin businesses, these administrative and professional fees can outweigh any remaining tax benefits.

Loss of financial flexibility

A key disadvantage often underestimated by first-time directors is that company money does not belong to them personally. Funds held by the company can only be withdrawn under specific rules, such as salary, dividends, or reimbursed expenses. Incorrect use of company funds can trigger director's loan charges, benefit-in-kind taxation, or penalties.

By contrast, sole traders have much greater flexibility to access their business income, making cash flow management simpler and less risky.

Reduced privacy and public disclosure

Limited companies are subject to public transparency requirements. Director names, registered office addresses, and summary financial information are available on the Companies House register. For home-based businesses or individuals who value privacy, this level of disclosure can be a significant drawback.

Recent reforms have strengthened identity verification and compliance requirements, increasing scrutiny of company officers and reducing anonymity further.

IR35 and contracting uncertainty

For freelancers and contractors, the IR35 off-payroll working rules remain a major disadvantage. Many organisations now avoid engaging limited company contractors altogether, while those deemed to fall "inside IR35" lose most of the tax advantages of incorporation without gaining employee benefits.

As a result, limited companies are no longer the clear choice they once were for independent professionals working through short-term or single-client arrangements.

Higher compliance risks and enforcement

By 2026, enforcement by Companies House and HMRC has become more robust. Late filings, incorrect submissions, or misunderstandings of director responsibilities can result in fines and penalties more quickly than in the past. Even unintentional non-compliance carries greater consequences, increasing stress and risk for small business owners.

Difficulty of exit if the business fails

Closing a limited company is also more complex than ceasing sole trader activity. Formal strike-off or liquidation procedures must be followed, and directors’ conduct may be reviewed if the company becomes insolvent. These processes can be time-consuming, costly, and emotionally demanding, particularly for small or one-person businesses.

Suitability for low or irregular profits

Perhaps the most important practical disadvantage is that limited companies are often poorly suited to businesses with low, unpredictable, or seasonal profits. For many owners earning below £30,000 to £40,000 annually, the additional complexity, cost, and rigidity of incorporation provide little tangible benefit.

In 2026, starting a limited company is no longer the automatic or universally advantageous choice it once was. Higher taxes, increased administrative burdens, tighter enforcement, and reduced flexibility mean that incorporation now makes sense only for businesses with sufficient scale, stable profits, or specific growth ambitions.

For many small businesses, freelancers, and early-stage ventures, alternative structures such as sole trader-ships may offer greater simplicity and resilience. Ultimately, the decision to incorporate should be based on realistic expectations of profit, risk, and long-term plans rather than outdated assumptions about tax efficiency alone.