A well-known benefit of forming a limited company is that you, the owner and other shareholders, are financially protected. Any investment in your company is at risk, but all personal finances are protected, should the business fail. There are, however, considerable more benefits and implications to setting up a limited company that not everyone knows about.Talk to an accountant
When you are setting up a new business, there are several models from which to choose, each with its own advantages. You might decide to become a Sole Trader, or form a partnership, but for people who want to employ staff and expand their business whilst safeguarding themselves and their personal assets from financial liability, the Limited Company model may well be the best option. Our professional team can help you set up your ideal business, and we’ll help you decide which type of company is right for you.
We will advise you on the advantages and disadvantages as well as providing a comprehensive service to deal with all of your requirements, including:
We can make the process of setting up your limited company quick and easy, but there are decisions to be made and facets that you should consider before setting up:
Private or Public?
Around 90% of companies formed each year are private companies limited by shares so this may well be the type that will suit your business.
There are pros and cons to both private and public limited companies. They are both owned by shareholders, but the main difference is that a private limited company is a more informal arrangement and is subject to less legislative restrictions.
For example, as a public limited company, you will need a minimum of £50,000 share capital, but private limited companies have no minimum requirement. In addition, private limited companies have a simpler management structure. There can be a single shareholder who is also the sole director. However, private limited companies cannot trade shares on the stock market.
There is rather more administration involved in a public limited company which is required to file annual accounts within six months of the end of their financial year. The public limited company must also have a legally qualified Company Secretary. They must also hold an Annual General Meeting.
Choosing to make your business a Limited Company has a big advantage for your own personal tax liability. You are entitled to pay less personal tax than if you were operating as a Sole Trader. A Sole Trader will pay a higher rate of income tax than the Corporation tax which you, as a limited company, must pay on your profits.
You have the comforting reassurance that as a limited company, you have limited liability for loss. This means you will not be personally liable for any financial losses made by your business, and you are protected from going personally bankrupt. Your personal assets are also protected. All businesses have to contend with unforeseen crises, and as a limited company, you have added protection against the day when something goes wrong.
Unfortunately for the Sole Trader, they don’t have that built-in protection. They are actually personally liable for any debts incurred by the business.
Other advantages include:
Personal payment advantages
As a limited company, there are tax allowances available to you if you pay yourself dividends rather than salary but pay your employees via PAYE.
As a director of a limited company, you are entitled to claim your pension contributions as a legitimate business expense, which means they can be made before any tax is deducted. Sole Traders don’t have this particular perquisite.
Separation of interests
A limited company is a distinct entity, completely separate from its shareholders and directors. Anything which can be defined as company business, for example submission of tenders, and company contracts, is entirely separate from the owners of the business. This separation makes it easier for the business to be sold if wishes, or to raise funds by selling shares.
Perception is reality in business and there is no doubt that a limited company is seen as a more solid, credible organisation than that of a Sole Trader. Larger companies often prefer to do business with limited companies for this reason.
Most new businesses have to think hard about where they will find their funding. The limited company status may well make this process easier especially when approaching potential investors.
Limited companies can raise funds by selling shares in the company, and can transfer shares to a new owner.
Protection for your name and your brand
As soon as you have registered with Companies House, your company name is safe. No other company can use your company name, or any name which Companies House think is too similar. Sole Traders unfortunately don’t have that protection. They are open to having their name and brand used by another trader, thereby damaging their own business, and they have no redress in law.
These are just some of the advantages of setting up your business as a limited company, but there is always a cost to be considered. For example, limited companies have more complex accounting requirements, need to be formally registered with Companies House, and the need to have properly qualified and appointed Officers. There is also the requirement for disclosure in the public domain of personal information about the Directors as well as public filing of the company accounts.
However, many people feel these requirements are well worth the effort, given all the benefits which can accrue from running the business as a limited company.