There are many considerations a business start-up when it chooses its legal structure. Here we look at the pros and cons of using a limited company.
The Main Advantages of using a Limited Company…
1. A Limited Company may appear more credible and substantial although in reality this is not necessarily the case.
2. The Liability of its shareholders is limited to the amount of the share capital issued and so offers protection to personal assets. In the event of company failure and not being able to pay its creditors, your personal assets are protected. However, banks, landlords and others when dealing with a Limited Company will often require personal guarantees.
3. A Limited Company has better borrowing potential as it can use current assets as security by creating a floating charge over its assets.
4. You can use shares to enable different people to have different shares of ownership that they can pass onto the next generation.
5. You can have different classes of shares with different rights, such as non-voting shares for someone who wants to invest some money into the company but doesn’t wish to take part in the management.
6. Having a limited company can change the tax rate of a higher rate tax payer from 40% or 50% to 21%. The exact savings do depend on how much of the profit you leave to reinvest in your business. Taxpayers can also avoid paying any national insurance at all by using dividends. For someone earning £30,000 in a year as a sole trader, the amount of Class 4 NI to be saved is around £2000.
Main Disadvantages of using a Limited Company…
1. Your annual accounts have to be filed at Companies House and are available for public inspection as is other information about the company.
2. Directors are personally subject to regulations and can be fined or found guilty of a criminal offence for failing to comply.
3. A company is more complicated to wind up.
4. Generally involves higher accountancy fees as there is more for the accountant to deal with.
5. Taxable benefits on having your car in the company can be substantial.
The best tax structures can sometimes end up with one business being split into two distinct businesses, one running as a Limited Company and one as a sole trader/partnership to get the best of both structures. You can even have a business with a business structure such as a partnership but with one of the partners being a limited company. There is a lot that is possible once you start to put your mind to it.