One of the most popular business models comes in the form of the limited company. A limited company is a company where the owners are legally responsible for any of its debts to the extent of the amount of capital that they have invested into the company. There are many advantages to becoming a limited company, and we’ll be talking about a few of those here, as well as outlining possible cons.
Tax
Tax changes when you become a limited company. Limited companies only pay 19% tax on their profits, as opposed to the 20%+ that most other sole traders pay for their businesses. In addition, rather than paying personal tax on top of your corporation’s tax, you can retain the surplus of your business’ income to pay for future operational costs. Reinvesting this surplus cash makes more sense than withdrawing all of your profits and reinvesting your own personal finances when your business needs a boost.
Structure
Sole traders don’t have a separate identity from their business, and that can cause issues. Unlike the sole trader business structure, limited companies are their own “person” and have a completely separate identity from their owners and managers. Limited companies can actually enter into contracts using the name of the company, rather than the name of any one person who may own the company, because they are their own legal entity.
The owner of a limited company is only liable for the value of any unpaid shares or their own personal guarantees. They are not responsible for the liabilities of the company as a whole. This also means that companies can be passed on after the death of their original owner, the business can be sold, transferred, or inherited. This means that there is little to no disruption when a company switches owners if they have limited company status.
Liability
Liability is a huge thing in the business world. With a limited company, you actually gain some liability protection. Should your company run into any trouble or issues, your own personal assets are secure and cannot be taken into account should you need to make a pay out on behalf of your company.
Your business is entirely separate from you; you can lose the business, but you can’t lose anything you own that is separate from the business. Of course, that is a worst-case scenario. As a shareholder, you have no legal obligation to pay out any more than the value of the shares that you own in the company. It’s a neat safety net to have under you.
The Cons
As with any business venture, there are a few cons to consider. The most prominent cons of a limited company are that you must be officially incorporated at Companies House, and you are required to pay a registration fee to become incorporate. There is also a lot more paperwork and record keeping required of limited companies than sole traders. For example, you will be required to file a corporation tax return every year (even if you don’t have any corporation tax to pay), an annual confirmation statement with companies house, and a full set of annual accounts just to start with. You’ll also need to provide statutory books containing the minutes of any meetings held between shareholders or board members, including dates and the names individuals present. None of this is insurmountable, but it does add a little extra to the workload of an already busy business owner.
Ideally, you should speak to an accountant about becoming a limited company and the financials that are involved in this endeavour. At Cove Accountancy Services, we help new and established business owners understand what the formation type of their company means, what they need to do, and which options would be best for them. We work closely with our clients to make sure their company is formed in a tax efficient way, that can deliver the results they need from it. If you have any questions about the legal structure of your company, or you just want some advice, just get in touch with us today and book your free consultation.