Benefits of a Limited Company
It’s easier than you think to get started
Nowadays, it’s very easy to start a limited company and can be done efficiently online. You no longer have to wait weeks for Companies House to process paperwork- you can actually start a limited company in the space of a few hours! The cost of incorporating is an allowable expanse against corporation tax, too!
The Companies Act 2006 which has been fully effective since October 1st 2009 made a number of changes making it easier to run a limited company. In an ongoing quest to support and promote enterprise, the government continues to examine ways to give well running companies the freedom to focus on business rather than be bogged down by administration formalities.
A limited company has a separate legal identity
Limited companies have their own legal identity. Third parties contract with the ‘company’ and not the individual directors and shareholders. This means that limited companies survive the death of the owners and it’s possible for directors and shareholders involved with the company to change over the time.
A limited company’s existence will only cease if it’s formally wound up, liquidated or by other order of the courts or Registrar of companies. Among other benefits, this provides more perceived for employees than alternative business structures.
The owners’ liability is limited
The shareholders of company have limited or capped liability for the debts of the business. The extent of the liability is the amount paid for their shares plus, if they have any, the unpaid amount on any nil or partly paid shares. Generally, in practice it is usually just the amount paid for the shares plus any unsecured loans made to the company.
This limit on the shareholder liability is a stark contrast with the situation for partnerships and sole traders where there is potentially unlimited personal liability for the debts of the business. A limited company can allow you to take a calculated business risk without the chilling prospect of losing everything. If the shareholder is also a director of the company, then the limit on their liability won’t always apply. If creditors lose money through director fraud, the directors’ personal liability is unlimited.
Potential credibility and prestige
The formation of a private limited company suggests that the business has permanence and is committed to effective and responsible management. It gives suppliers and customers a sense of confidence and many companies, especially larger businesses, will not deal with an entity that’s not a limited company. Incorporating a business can open up new business opportunities that wouldn’t otherwise be available.
Sole traders and partnerships will not necessarily have a unique name, whereas the can only ever be one active UK company with any particular name. Once a company is registered with Companies House, the company name is protected and nobody can use the same or even a similar name.
There can be tax benefits
Partners in a partnership and sole traders pay income tax while companies pay corporation tax. While corporation tax rates are lower than income tax rates, the advantage lies with incorporation.
As well as salary payments to employees, a limited company can also pay dividends to shareholders. A shareholder director will therefore often choose to receive the most tax efficient mix of salary and dividends. Provided a minimum level of salary of taken, the director retains entitlement to certain benefits without any employee or employer National Insurance Contributions being payable. The balance of remuneration is taken as dividends, which tend to suffer less tax than salary and are not themselves subject to National Insurance Contributions. Dividends, would, however, be liable to corporation tax within the company.
Rather than an employee director funding pensions out of taxed income, the company can make pension contributions. A company will often be able to make a higher tax relievable pension contribution than an individual and contributions will usually be a tax deductable expense for the company. It should therefore gain Corporation Tax relief against the value of the contribution.
There are no National Insurance Contributions for an employer or employee on pension contributions and contributions are generally not taxable for the employee.
If you need advice in this area, please get in touch with us! We can offer advice and further insight and answer any questions you may have.
Dormant companies can be set up
A company does not have to trade to exist. It can be dormant which means it has made no ‘significant accounting transactions’ during its financial year. This can be useful if have an idea and a name for a business but not yet the time or capital to develop it. You’ll need to register the name and maintain the necessary formalities to keep the company on the register, although these requirements for dormant companies are somewhat easier to meet than those for other companies.
Exit from the business
Registering a business as a limited company can aid the possibility of selling it in the future, which can be difficult to achieve with other business structures. The original owner may be able to achieve a completely clean break and receive some financial benefit to help fund their future lifestyle – or the start of another business!
Are you setting up a limited company?
If you’re looking to set up a limited company and would like accounting advice, please get in touch with us, we look forward to hearing from you!