Advantages And Disadvantages Of Limited Company Pdf

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Setting up a business as a limited company is the second most popular way of setting up a business in the UK.

Advantages and disadvantages of a public limited company

A limited company is one of the most popular legal structures for all types and sizes of businesses in the UK. This is due to the many professional and financial benefits it offers, all of which far surpass those available to sole traders or contractors working through an umbrella company. To enable you to make an informed decision, we will provide an overview of the limited company advantages on offer.

We will also outline of the potential downsides of company formation when compared to the sole trader structure. The principal reasons for trading as a limited company are limited liability, tax efficiency, and professional status. However, there are a number of other limited company advantages available.

Below, we discuss each one in turn. The biggest benefit of forming your own company is limited liability protection. Simply put, should your company run into trouble, your personal assets will be secure. Therefore, the business is entirely separate from the people who own and manage it. As a shareholder, you will have no legal obligation to pay more than the nominal value of the shares you hold. If your company becomes insolvent and is unable to pay its creditors, you will only be required to contribute the nominal value of your unpaid shares.

Beyond that, your personal assets will be protected. Sole traders, on the other hand, run a much higher risk. They are personally liable for any and all business debts, losses, and liabilities. As a sole trader, there is no separation between you and your business. If the business owes money, you owe money. Therefore, your personal assets, including your home and savings, could be seized to pay your creditors.

Limited liability is crucial if you plan to provide high-value supply or services that could lead to liability claims. If any such situation were to arise while running your business as a limited company, you would not be forced to use your own assets to cover these liabilities unless you gave a personal guarantee to the company or you were found guilty of wrongful trading or other criminal acts.

Your professional status and image will improve considerably when you start trading as a limited company. Whilst the activities, ownership structure, and internal management of your business may be the same as when you were operating as a sole trader, companies are held in much higher regard and create a better impression. The difference in perception stems largely from the fact that incorporated businesses are more rigorously monitored. Limited companies have more complex accounting and reporting requirements, their statutory compliance obligations are much greater, and their corporate details and accounts are published on public record where they can be inspected by other businesses and members of the general public.

A more professional image, coupled with the benefits of corporate transparency, could also benefit your business in many other ways, such as:. This offers greater flexibility for tax planning. Reinvesting surplus cash Rather than withdrawing all available profits each year and paying more personal tax on top of your Corporation Tax liability, you can retain surplus income in the business to pay for future operational costs and growth.

This makes more sense than withdrawing all profits, paying higher rates of Income Tax, and reinvesting your own finances when the business needs additional capital. Deferring personal income You can defer the withdrawal of profits to a later tax year when a lower rate of business or personal tax would be due.

This is an efficient strategy if the withdrawal of all available profits would take you into a higher Income Tax band or Dividend Tax bracket. Furthermore, the company will not pay Corporation Tax on the salary because wages are a deductible business expense. The rest of your income can be taken as dividends, which are paid from post-Corporation Tax profits.

Above this sum, you will be required to pay Dividend Tax. However, Dividend Tax rates are much lower than Income Tax rates. Depending on your annual profits, you could save hundreds to thousands of pounds in tax every year by operating as a limited company rather than a sole trader. As a result, companies can enter into contracts in their own name and are responsible for their own debts and liabilities.

If a company becomes insolvent, it is the business itself that is declared bankrupt, not the shareholders or directors. Furthermore, this means that companies enjoy perpetual succession and survive the death or ownership of the original members.

The business can be sold or transferred to other people at any time, thus enabling the company to continue to exist with minimal disruption to clients and employees. The professional status of a limited company structure will add valuable prestige and credibility to your business.

In fact, certain businesses and agencies particularly in the IT, finance, and construction industries are only prepared to engage with other incorporated businesses. This is usually due to the level of risk involved in the contracts they award.

In most cases, sole traders are simply not considered for these types of contracts, so a company really can improve your competitive advantage. Generally, companies also have access to more lending opportunities than sole traders, and certain banks will only lend to incorporated businesses.

Furthermore, it is often possible to secure a loan for a company without the need for shareholders or directors to provide security against their own property. All company names must be entirely unique, so no two companies can be set up with the same name, or even names that are very similar to one another.

The official name of your company cannot be registered and used by any other business. Companies provide the opportunity to invest pre-tax trading income in a company pension scheme, as opposed to investing withdrawn income in a personal pension after the deduction of business tax and personal tax.

If you own a limited by shares company, you can issue shares to your spouse or family members. This will allow you to split your business profits and minimise personal tax liabilities.

There are some less favourable aspects associated with limited company formation, as one would expect from anything that provides so many benefits. However, most of these perceived disadvantages pale in comparison to the tax advantages, enhanced professional image, and limited liability protection you will enjoy.

Setting up as a sole trader is one of the easiest things to do in terms of registration and administrative requirements. However, there is no legal distinction between the business and the sole trader.

This means that you would be wholly and personally responsible for all business debts and liabilities. Your home and other assets would be at risk if you were unable to meet your financial obligations or if legal action was taken against the business. On the flip side, because there is no legal distinction between your personal finances and business finances, there is no need to go through any complex procedures to remove money for personal use.

However, there may come a time when it is financially or professionally beneficial to consider limited company formation. If you reach that point, your first port of call should be an accountant who can advise on the best course of action. There is no doubt that company formation will reduce your liability in the event of your business facing financial difficulty.

A limited company also offers many tax benefits; there are numerous advantages to having a prestigious professional image and status; and you can set up a company for non-profit or charitable purposes. The benefits must, however, be weighed against the additional time and money required for the additional administration and accounting requirements you will have to deal with.

To chose the best structure for your business, your decision should be based upon your own personal preferences, in addition to professional, tailored advice from an accountant or advisor who has a clear understanding of your business objectives and long-term plans. Sole traders and company directors who receive remuneration other than a salary through PAYE must register for Self Assessment by 5th October after the end of the tax year being reported in the tax return.

This will contain your personal Unique Taxpayer Reference UTR and information about your tax obligations and filing responsibilities. The tax year for Self Assessment runs from 6th April — 5th April the following year. Therefore, the current tax year began on 6th April and ends on 5th April You can file your tax returns by post or online, and you can pay your Income Tax and National Insurance contributions electronically.

You must send a tax return even if you do not have any tax to pay. However, this fine may be waived if your make an appeal to HMRC. If you are late paying some or all of your tax, you may be charged a percentage of the outstanding balance.

Rachel Craig is a technical manager with Rapid Formations and is responsible for the successful delivery and development of our products. Rachel joined the company in and is highly knowledgeable in company law and company formation, and is recognised as an expert in this industry. Hi, I am impressed with the answers you have supplied to others, and hope you can help us.

We, husband and wife,, are considering the possibility of setting up a non-profit making limited company for the purpose of owning our road, which is not adoptable by the local council. We and neighbours have spent a lot of money improving the road, which now seems at risk of damage from a new development nearby, so we need insurance and legal status.

We would then need to apply for the deeds from, I think, Chancery Division. My husband is currently Chair of our Residents Association but this is likely to disband soon. Thank you for your kind words. Unfortunately we cannot advise on the structure of any business as we are not professional advisors and we would advise that you speak to an accountant or lawyer to get the correct advice to deal with this more unusual business concept.

Dear Am Baio, We are not pension advisors however if you are receiving state pension and form a limited company then you would declare the state pension on a tax return along with any income taken from the limited company. Kind Regards, Rapid Formations Team. I am changing from sole trader to limited company is it possible to retain my gross payment status for tax purposes?

Dear Stan, Thanks for your message. Kind Regards. Ohh thanks very much for advising i think limited companies has more advantages than sole bcs personal property are secured. Must be officially incorporated at Companies House Required to disclose personal and corporate information on public record.

Dear Lee, Thank you for your message. The two disadvantages you have highlighted are very similar in nature. The point being made is purely from a privacy perspective in that if you were to set up a business as a sole trader or partnership not Limited Liability Partnership , your information would remain private, whereas limited companies have to comply with the Companies Act which requires certain details to be available to the public through the Companies House website such as the names of directors, the company address etc.

Best regards, Rapid Formations Team. If I am a sole trader registered for vat and change to a limited company do I still have to be vat registered as a limited company? I am forming a ltd company where am a sole director n shareholder.

Please advise in the following;. In case I need more capital to run day to day activities and pay salaries, can I borrow from a friend? You would not have to contribute that sum of money initially, unless you were using it as start-up capital, though I would strongly advise against setting such a high nominal capital.

These expenses have nothing to do with nominal share capital. It is solely your decision if you wish to borrow money from friends or family, but you must record this income and report it in your accounts. You can choose how much to pay yourself as a salary and you can do this as soon as the company has available funds.

Advantages and Disadvantages of a Company Form of Business – Explained!

The liability of shareholders, unless and otherwise stated, is limited to the face value of shares held by them or guarantee given by them. A company has a separate legal entity with perpetual succession. In company business, the management is in the hands of the directors who are elected by the shareholders and are well experienced persons. In order to manage the day-to-day activities, salaried professional managers are appointed. Thus, the company business offers professional management. As there is no limit to the maximum number of shareholders in a public limited company, expansion of business is easy by issuing new shares and debentures.

The process of registration or incorporation adds the owners as shareholders of the business and the managers as Company directors. In smaller limited companies there may only be one person who is the sole director and shareholder. So why would you bother? What are the key advantages and disadvantages to using a limited company? This personal liability is limited to the value of the shares the owners agree to purchase when the company was first set up — the share capital of the company. The owners of unincorporated businesses such as sole traders and partnerships are personally liable for all of the debts of their business in the event the business runs out of cash.


1. Minimising personal liability. The biggest benefit of forming your own company is limited liability protection. Simply put, should your company.


Advantages and Disadvantages of a Limited Company

What are the Advantages of Private Limited Companies? Are there any disadvantages of a Private Limited Company? A Private Limited Company is a company which is privately held for small businesses. The liability of the members of a Private Limited Company is limited to the number of shares respectively held by them. Shares of Private Limited Company cannot be publicly traded.

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A limited company is one of the most popular legal structures for all types and sizes of businesses in the UK. This is due to the many professional and financial benefits it offers, all of which far surpass those available to sole traders or contractors working through an umbrella company.

Most likely, you are well aware that there are several different choices when it comes to the type of legal business structure to select for your new venture. A Limited Company is a great choice for those who would like to bring in other individuals to share the workload and the risk involved. One of the biggest advantages of a limited company is that the limited company is truly an entity unto itself ; paying its own bills and passing the profits on to its shareholders, who in turn pay taxes as individuals. With the spoils, however, come many obligations.

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4 Response
  1. Damiane L.

    The advantages and disadvantages of a limited company. Tax efficient. Limited liability. Separate entity. Professional status. Company pension. Maximising tax-free income. Complicated to set up. Complex accounts.

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