In this article we will lay out the advantages of a private limited company and also its potential disadvantages in some scenarios. Using this information, you can decide what is best for your business.
As a business owner you are faced with challenging decisions on a daily basis. Some of these may prompt you to steer an entirely new course for your business’s future. One question, at some point, may be whether to register it as a limited company.
Although incorporation has a wealth of benefits, becoming a limited company should not be seen as a simple way of upgrading your enterprise. Every business is unique and the benefits of becoming a limited company will depend upon your own circumstances and vision for the future.
The advantages of becoming a private limited company
To put it simply, a limited company will offer your business distinctive financial, legal, and professional gains, some of which will have a truly transformative effect. The following points show you some of the key benefits conferred by a limited company.
A unique legal status
In order to explain the advantages of a private limited company fully, it is first worth discussing its unique legal status. The most significant characteristic of a registered company is that it has been incorporated, gaining what is known as “legal personality”. In other words, a company is a legal entity which is separate from those who own or manage it.
This can be exceptionally beneficial. For example, a company could own property or enter into legal relationships. Perhaps the most noteworthy feature of this concept, however, is that it limits your personal liability. A company’s debt or legal claims are directed at the company itself rather than at those who own or run it (including owners, directors, and shareholders). This means that, in the event of your business facing financial difficulties, your personal assets will remain protected. Likewise, if your company were to face legal action, then it is the company itself that would be held accountable. This legal concept is known as the “corporate veil” and acts as a personal safeguard between a company and its managers.
In contrast to the above, sole traders are personally liable for the debts, losses and legal claims that their businesses might face. If your business were to become bankrupt then creditors could be entitled to claim your personal assets — including your own property. Or, if a client were to take legal action against your business, then you could be sued for a considerable amount.
Although limited liability does not give you total legal immunity — such as from criminal or fraudulent acts — it is an important way of protecting yourself, especially if you run a business with high margins or risk.
Aside from limited liability, two more important legal benefits of a company setup include:
- Once you have registered your company name, it is protected and cannot be used by anyone else.
- A company may continue indefinitely. In essence, a company can survive the loss of its original members and can be transferred to different owners.
For those concerned with the legacy of their business, these points are hugely significant.
A prestigious image
Having “Ltd” after your company’s name should not be underestimated: Company formation will change how the public perceives you. Companies are generally held in higher regard than sole traders and many customers and suppliers will be more likely to place their trust in you. The impact of incorporation could potentially be more powerful than any marketing campaign or brand development that you devise as a business.
There is a reason for this rise in status, which is perhaps deeper than simply having “Ltd” after your company’s name. It stems from the fact that registered companies face greater scrutiny than non-incorporated businesses and there is greater transparency regarding their finances and corporate details. Moreover, a company’s statutory obligations are much stricter that those of a sole trader and face monitoring from governmental bodies. Although this may be seen as a negative, it serves as a reassurance for those considering whether to invest their time and money in your business.
As a private limited company you can therefore expect to see more business opportunities and attract new clients and investors than before the change of status. In fact, companies dealing with higher-risk trade and contracts may have a policy of working only alongside other registered companies, thereby mitigating their own liability.
Overall, being incorporated bestows a legitimacy that may be crucial for your business’s expansion.
Financial efficiency and control
Put simply, a limited company structure can be a more efficient system of business that gives you more options regarding your finances. Here are some of the most notable examples:
- Limited companies in the UK presently pay only 19% Corporation Tax on their profits. In contrast, sole traders can pay anywhere from 20% to 45% on their Income Tax for all taxable earnings.
- Companies can smartly – and legitimately – reduce the tax that they pay. As a director and shareholder of a company you can reduce your National Insurance contributions (NIC) by choosing a modest salary and drawing most of your income as dividends. You will need to pay Dividend Tax on dividend income over £2,000 but this is still less than the Income Tax.
- If your company is limited by shares then you can issue shares to a spouse or family member. Consequently, you can diversify your business’s profits and lessen personal tax liabilities.
- As an owner and director of a limited company you can contribute pre-tax income toward a company pension scheme. In some circumstances this can alleviate the total in tax that your company pays.
- Overall, you have greater options and flexibility to plan around tax, such as withdrawing profits in a later tax year when the rate is lower.
Disadvantages of a private limited company
There are, of course, some cases in which being a limited company can be less desirable. These disadvantages are a small price to pay, however, for even a handful of the benefits that have been mentioned so far. Having said that, let us consider some potential drawbacks.
In contrast to the likes of sole traders, limited companies must register with Companies House. Although it is easier than ever to achieve incorporation — especially through a specialist formations agency such as Uniwide — registering with HMRC as a sole trader is usually seen as being more straightforward.
Administrative and financial duties
Overall, the accounting and administrative requirements of a company are more involved. This includes sending Companies House a confirmation statement at least once a year to ensure that your details are up to date.
Furthermore, you will be required to report annually on your company’s activities for your financial year. Copies of these annual accounts must always be sent to the following:
- All shareholders
- Anyone who can attend the company’s general meetings
- Companies House
- HMRC (as part of your Company Tax Return)
It is very important that you adhere to any deadlines set out by Companies House or HMRC, otherwise you could face severe penalties. You may therefore need to hire some help to carry out the clerical side of running a company. For larger companies, it is advisable to hire an accountant, who will incur a financial cost.
As a limited company you are subject to greater scrutiny than non-incorporated businesses. Although this transparency has its own benefits, such as earning respect and trust, it does lead to less privacy regarding your business. Information that you provide to Companies House is made available to the public, including company accounts and the names of directors and shareholders.
As a director of a company, you also have a set of legal duties that you must follow, such as promoting the success of the company and avoiding conflicts of interest. These directors’ duties are enshrined in statutory law and penalties may be incurred if they are not followed.
Ultimately, the advantages and disadvantages of a private limited company setup will largely depend upon your business and its goals. For some smaller enterprises it may be more suitable to wait until your business has developed before seeking incorporation. If, however, you believe that you are being held back as a sole trader and want to improve the scope of your business, then becoming a limited company could have a transformative outcome.
The features that setting up as a limited company brings — not only to your business but also to yourself as an owner — are significant. Limiting your liability can empower you to trade with confidence, in effect equipping you with a kind of “legal shield”. Likewise, your existence as a registered company will reveal new avenues of business that were once beyond your reach. Finally, you will be given more options for dealing with your finances and you can make some intelligent choices that could save you money.
If you do decide to register your business as a limited company then Uniwide Formations can act on your behalf to make the process as smooth as possible. We know that each business is different, so we offer a range of company formation packages for incorporating your company or registering a partnership. Contact us today to learn more about our services and how we can help your business.