What Is A Limited Company?

Limited companies are one of the most popular business structures in the UK. They offer a number of advantages and disadvantages when compared to other business structures, such as sole traders or partnerships. In this article, we will explore the key advantages and disadvantages of limited companies.

Advantages Of Limited Companies

Limited companies have a number of key advantages when compared to other business structures. The most notable advantages are:

Reduced Personal Liability Compared To A Sole Trader:

Limited companies have limited liability, which means that the company and its shareholders are only liable for debts up to the value of their shares. This is not the case with a sole trader, who is personally liable for all debts and liabilities of the business.

Professional Status:

Limited companies are seen as professional businesses, which gives them a certain level of credibility and trust. This can be important when dealing with customers or suppliers.

Tax And Planning:

Limited companies have access to a range of tax planning opportunities that sole traders do not. These include things such as dividend payments, capital allowances, and corporation tax.

Higher Personal Remuneration:

Limited company shareholders can take advantage of a number of tax-efficient ways to pay themselves, such as through dividends or salary payments. This can result in a higher personal income than if they were self-employed.

Separate Legal Identity:

Limited companies have a separate legal identity from their shareholders. This means that the company can own property, enter into contracts, and sue or be sued in its own name.

Credibility And Trust:

Limited companies are seen as more credible and trustworthy than other business structures. This can be important when trying to win new customers or attract investment.

Investment And Lending Opportunities:

Limited companies have access to a range of funding opportunities that other business structures do not. This includes things such as crowdfunding, venture capital, and even going public on the stock market. Limited companies are also more likely to be able to borrow money from banks due to their limited liability status.

Protecting A Company Name:

Limited companies can protect their company name by registering it as a trademark. This gives them exclusive rights to use that name in relation to the products or services they offer.

Pensions:

Limited company shareholders can take advantage of pension schemes that are not available to self-employed people. This can provide a valuable retirement income in later life.

Splitting Income:

Limited company shareholders can split their income between salary and dividends to reduce the overall tax bill of both themselves and their business. This is not possible for sole traders, who must pay all profits as self-employment income tax.

Disadvantages Of Limited Companies

Limited companies have a number of key disadvantages when compared to other business structures. The most notable disadvantages are:

Higher Costs:

Limited companies have higher costs than other business structures, due to the need to comply with company law and file accounts at Companies House. This can include things such as accountant fees, company formation costs, and annual compliance costs.

Accounting Requirements:

Limited companies must keep detailed accounting records, which must be filed with Companies House. This can be time-consuming and complex, particularly for smaller businesses.

Company Secretary:

Limited companies are required to appoint a company secretary within one month of incorporation. This is a role that must be carried out by a qualified individual, and it cannot be carried out by the company’s directors.

Limited Companies Must Be Incorporated At Companies House

One disadvantage of a limited company is that you have to register with Companies House. Limited companies are subject to a range of statutory requirements, including the need to file detailed accounts at Companies House each year. This can be time-consuming and expensive for smaller businesses. Limited companies must also submit an annual confirmation statement (form CS01) to Companies House every year which confirms that details held on public record are up to date.

Privacy And Public Record

Limited companies have limited privacy when compared to other business structures. Limited company accounts and details of the company’s directors, shareholders, and registered office address are all on public record with Companies House.

Accountant Costs

Limited companies must abide by strict accounting requirements, which means they often rely heavily on accountants to manage their compliance responsibilities. This can be costly for smaller businesses if they hire incompetent accountants. Limited companies must file annual accounts at Companies House, which is a time-consuming and complex process that many business owners prefer to delegate to an accountant. Limited company directors can also face fines if they do not file their accounts on time with Companies House.

Changes To The Company

Limited companies are subject to strict rules about how they can change their name, structure, or share capital. This can be difficult and expensive for businesses that want to make changes.

Operating As A Sole Trader Business

Starting a new business as a sole trader is easy. You do not need to register with the government, which will save you time and money.

However, the law sees no difference between a business and a sole trader. This means that your personal income could be at risk if your business is unable to meet its financial obligations.

If you want to take money out of your business for personal use, there is no need to take complex steps. If you want to keep your company affairs private, doing business this way will help. This way, accounts, and other details won’t be published online for everyone to see.

Self Assessment

Limited company directors are responsible for filing an annual self-assessment tax return. Limited company shareholders can choose to operate their business as sole traders, which allows them to avoid the need for self-assessment.

Limited companies must file annual accounts at Companies House, which is a time-consuming and complex process that many business owners prefer to delegate to an accountant. Limited company directors can also face fines if they do not file their accounts on time with Companies House.

Limited companies are subject to strict rules about how they can change their name, structure, or share capital. This can be difficult and expensive for businesses that want to make changes. Limited company shareholders have limited liability when it comes to the debts and liabilities of the company.

Conclusion

There are a number of advantages and disadvantages to Limited Companies. It is important to weigh up the pros and cons before making a decision about which business structure is right for you. Limited Liability Limited companies are separate legal entities from their owners. This means that the business itself is liable for its own debts, rather than each individual shareholder or director being responsible if it fails to pay its debts.