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Pros and Cons of Limited Companies

Pros and Cons of Limited Companies

Limited Companies are positioned at a greater advantage regarding their liability when compared to other business structures. Owners of this type of company are legally seen as a separate entity and have therefore limited liability for any financial loss the company may incur. In addition, limited companies carry a professional status and convey more trust and credibility resulting in the attraction of more investors.

There are many benefits you can get from selecting this structure for your business, however, the requirements are more complex and costly than other business models available. We have numbered a set of pros and cons present in the world of limited companies to help you choose the best option for your business.

PROS

1. Distinct Entity

A limited company is an entirely separate identity from its owners. Therefore, anything related to it such as bank account, contracts, company assets, debts and other liabilities, is the full responsibility of the company and will remain separate from the interests of the company’s directors and shareholders, unless there has been a fraudulent infringement.

In addition, ownership can be succeeded by new appointed directors and shareholders. So the limited company can exist in face of the retirement or death of its owner/s and it can be sold or transferred without any disruption in its functional structure and in its relationship with employees and clients.

2. Reduced personal liability

Shareholders and directors dispose of limited liability. They are not legally responsible to cover any financial loss, and their personal assets remain protected unless there has been a fraudulent action or a personal guarantee has been given.

In face of bankruptcy or company dissolution, if the shareholders own unpaid shares they are only liable to provide for the share price initially given in the shareholder agreement or if they have partly paid shares, only the remaining amount must be covered, otherwise, they will stand as debtors. If their shares have been fully paid they are not liable for anything.

Furthermore, investors are more inclined towards this model of business since their investment has more protection than other types of business such as sole trader and partnership structures.

3. Professional status

Limited companies convey a more professional status leading to increased trust and credibility.  This positions them at a better competitive advantage since certain companies will only deal with this type of business structure because of the level of risk involved in the contracts they award.

In addition, they are heavily monitored and have a rule of transparency. Limited companies have greater statutory compliance obligations and their accounting and reporting requirements are more rigorous. Also, both the company details and accounts are made public so individuals and businesses can freely inspect; this allows for the building of a stronger identity, attraction of new investors, funding opportunities and expansion in the market.

4. Tax efficiency

A set rate of 19% is paid towards Corporation Tax. This positions limited companies at an advantage when compared with the 20-45% of Income Tax a self-employed has to pay.

As a director, you are allowed to combine salary and dividends in order to reduce the amount of Income Tax and National Insurance Contributions being paid. One way of doing that is by keeping your salary below the NIC threshold so you don’t have to pay any Class 4 NIC or Income Tax, and drawing income from dividends which are not subject to NICs and are tax-free on the first £5,000.

In addition, you also have the option of issuing shares to your spouse and other family members to take advantage of their tax-free Personal Allowance (£11,850) and tax-free annual dividend allowance. You can also retain surplus income for future investments and operational costs in the business; this is much more convenient than withdrawing your profits, paying tax on it and then using it for reinvestment.

5. Investment and lending opportunities

Since limited companies are allowed to have multiple shareholders, raising additional capital becomes easier by selling shares. Furthermore, banks favour this business structure because of its stronger credibility and ability to secure business finance and they facilitate lending opportunities.

6. Company name

The name of the company cannot be the same as another company, it is protected by law and it must be entirely unique. This is advantageous in that your company will show originality and there will be nothing like it, however, it could be difficult to find a name that is not already registered.

7. Pensions

Companies are allowed to invest pre-tax income in a company pension scheme instead of using income after tax deduction. This is legitimised as a business expense and it provides a tax advantage for those who are self-employed.

CONS

1. Initial Registration

Limited companies must be incorporated at Companies House and pay for registration. The fee is  £15 if you do it yourself, however, the process can be quite complex so you can always outsource. MadeSimple is a good option and they charge £50 to get your company started in.

Undischarged bankrupts and disqualified directors will not be allowed to open a limited company.

There are restrictions on the company name, it cannot be offensive and it must be original so you have to check for name availability. If the name you choose is available, once your company is registered no one will be able to have the same trade name. In addition, you must notify Companies House of any changes made to your company details.

2. Complex Accountancy

The accounting requirements are more demanding. A confirmation statement and annual accounts must be annually filed at Companies House as well as company tax return must be sent and corporation tax must be paid to HMRC.

Appointing a qualified accountant to do the job for you is the best option instead of going through a complex process yourself. Bear in mind, that the accountancy fees tend to be more expensive for limited companies than for sole traders since the requirements are higher.

3. More Demands

There are strict procedures for record-keeping and money withdrawal. All decisions taken by directors and shareholders must be kept in record and directors are expected to file statutory statements to Companies House, failure to do so will result in a penalty.

4. Privacy

Disclosure of corporate information such as accounts and company registers on public record is a requirement. Anyone can have access to company information thus making integrity and transparency of extreme importance.

As with every business model, limited companies have a positive and negative side. Careful consideration will lead you to the right decision and if you choose not to go with this type of business you can always check the other types available.

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