The pros and cons of forming a limited company | lawpack.co.uk

Lawpack on May 13, 2020

Limited companies are among the two most popular types of company chosen by UK business people, with the sole trader route the other main avenue.

The first step for anyone setting up a limited company is to register it with Companies House, which oversees the registry of companies.

Company registration matters are enshrined in the Companies Act 2006, with Companies House an executive agency of the Department for Business, Innovation and Skills.

Currently, there are more than two million limited companies registered in Great Britain, with over 300,000 new firms incorporated every year.

Under the Companies Act 2006, each limited company must have at least one director. However, having a company secretary is no longer mandatory.

Business owners are often unsure about which entity to trade as – sole trade, partnership or limited company.

There is no legal obligation for companies to trade using a particular entity, but there are differences between them. Here we outline the pros and cons of limited company incorporation.

What are the advantages of forming a limited company?

Status

The term ‘limited’ gives the company a bit more weight so it appears to hold more esteem and seems bigger, both for potential investors and consumers.

Investors

Investors are more inclined to take a chance on limited companies as their investment has more protection than a sole trader or partnership.

Under a limited company, the investor’s liabilities are also limited to their shareholding, thus giving them more security than other companies offer.

Security

As such, banks also tend to favour limited companies and they are given the chance to take out extra security by lodging a ‘floating charge’ over the company’s assets.

That means that if the terms and conditions of the loan are breached, the bank has the first claim on the assets.

Shares

Provided there are no unusual clauses in the shareholder’s agreement or company’s articles, transferring shares in a limited company is generally easier and more straight-forward than it would be in a partnership or sole trader.

Dividends

The dividends of a limited company are not subject to national insurance and are at a lower rate of tax than self-employment income.

Effective tax rates

If you intend retaining some of the profits within the business, then it might be best to go limited as this reduces the tax rate.

Despite these positives, there a number of cons to keep in mind.

What are the disadvantages of forming a limited company?

Liability

Banks will still require personal guarantees from the directors, which means that the directors can still be liable for the company’s debt.

Administration

Directors are also expected to deliver statutory documents to Companies House, so anyone failing to do this is subject to late filing penalties and could be deemed to have carried out a criminal offence.

Less privacy

Becoming a limited company means accounts and other details are held on public records so anyone, including competitors, can access company information, although it can be restricted.

Withdrawals

Making withdrawals from the company can also pose a problem in terms of tax as it is difficult for shareholders and directors to separate their finances from those of the business.

Accountancy fees

One expense bound to be higher for limited companies is the accountancy fee as reporting requirements tend to be bigger.

With all this in mind, it is worth remembering that limited company incorporation can be a profitable prospect, so why not read Lawpack’s practical guide on How to Run a Limited Company?

Written by HM Williams Chartered Accountants, this detailed guide is packed full of information and expert advice on the legal duties and formalities that must be followed when incorporating a company.ADNFCR-1645-ID-801387379-ADNFCR

How to write a winning business plan

Lawpack on May 13, 2020

Throughout the educational process, lecturers and teachers often argue that you should begin an essay with the conclusion.

Not only does this give the audience a way into your argument, but it helps to inform their expectations of what you intend to achieve.

Most importantly, it should be so inspiring that the reader could not possibly consider putting it down, for which the same can be said of an exceptionally-well researched and written business plan.

Here are our top tips on what you should include in a winning business plan:

1. Get a good start

Open with an executive summary, which as the names suggests, is an overview of the business plan. This should invite investors to continue reading your ideas.

2. Outline your wares

Once you have attracted their attention, it’s vital that you address key issues so the investor knows the kinds of risk they face by putting their money into the business.

Explain what products or services you intend offering and quickly identify your market to prove there is a viable business opportunity at hand.

3. Do market research

Some market research could really be useful here as this will enable you to serve up some winning facts and figures your investors cannot ignore.

Within this research, reveal the size of the market, the extent to which it is due to grow and how you plan to penetrate it.

4. Online or retail?

Tell your investor how you will offer your products or services, such as whether they can be ordered online, via the phone or in-store.

5. The competition

Caribbean-American poet Audre Lorde once famously said “there are no new ideas” and this is as true in the business landscape as it is in literature.

That is why it’s vital that you prove to your investors that you are well aware of the competition you face, but do illustrate the innovative ways you might rival these competitors.

6. Check your grammar

Similar to essay writing, the business plan will be received with critical eyes, so as well as ensuring that it’s written in a professional and engaging tone, it’s also important to ensure that the spelling and grammar is correct.

While this might seem less important to you than projecting that your start-up will be earning millions within its first year, the likelihood is that investors will see such errors as a reflection of you.

7. Do SWOT analysis

Base your business plan on SWOT analysis, which simply stands for strengths, weaknesses, opportunities and threats.

This short acronym is arguably the most important guide to follow when drawing up a business plan as it briefly reminds you of all the information you need to include.

8. Create deadlines

You need to give your investors a clear time frame on when you believe your business will be in full swing, and at this point it’s worth presenting estimates of the costs you expect to face, as well as the profits you hope to enjoy.

9. Create a cash flow forecast

Parallel to this is a strong cash flow forecast, which will detail how quickly you expect to receive money against how much you will need to spend to keep the business going.

10. Funding

Don’t forget to tell investors exactly how you intend to fund your business, what you might do to overcome unforeseen problems and whether or not you will be hiring staff, and if so, from where and how many.

Both a cash flow forecast template and a business plan template are included in Lawpack’s Limited Company Formation Kit.

A sample business plan is also available in Lawpack’s expert guide How to Run a Limited Company.

Issuing shares – Q&As

Lawpack on May 13, 2020

A limited company consists of one or more shareholders who own shares. When a limited company is formed, it issues shares to its shareholders.

How are company shares paid for?

Company shares are paid for with money, property or services.

What is ‘issued share capital’?

If, for example, shareholders applied for two shares and these were issued, you would say that the limited company had an issued share capital of £2.

Can the limited company accept cash for shares?

If limited company shares are to be allotted for cash, there are statutory rules governing the manner and timing of such an offer. These limited company rules state that company shares must be offered to existing shareholders, in proportion to their shareholdings.

If you, as company director of a limited company, want to exclude these rules (e.g. if you want to offer shares to a new shareholder) you should take legal advice.

Can company shares be issued at a higher price?

A limited company can issue shares at a price greater than their nominal value to bring more money into the limited company, while protecting the voting rights of existing shareholders and avoiding the procedures required to increase the authorised share capital of the company.

For example, £1 shares could be sold for £10 with the difference between the actual and nominal value of each company share (£10 – £1 = £9) being held in a separate account, known as a ‘share premium account’.

Remember that no private company is allowed to issue or cause to be issued any advertisement offering shares for sale to the public.

Are the limited company’s shareholders entitled to dividends?

Shareholders are entitled to any dividends declared by the limited company, plus a proportion of the limited company’s assets on dissolution.

How are the limited company’s shares paid for?

Company shares may be paid for, nil paid (unpaid) or partly paid for on issue.

If the company shares are partly paid for or nil paid, the limited company will be entitled to ask for the balance owed on each share and the shareholder must pay it.

What happens once the shares have been issued?

You must send Form SH01 (available to download when you purchase Lawpack’s Limited Company Formation Kit) to Companies House.

What happens if the shareholders want to sell or give away their shares?

Shareholders may only transfer their stock in accordance with the Articles of Association. The limited company is obliged to offer the shares being transferred to the existing shareholders.

What if the company fails to find a purchaser for the shares?

If the company fails to find a purchaser among the existing shareholders within 28 days, it’s usual for the selling shareholder to be free to sell his/her shares to outsiders (subject always to the limited company directors’ power to refuse to register a transfer of shares).

Does the stock transfer need to be registered?

When shares are transferred, a share transfer form must be completed and either stamped with the necessary stamp duty or, if the transfer falls within one of the exempt categories, the necessary certificate claiming exemption from stamp duty has been completed.

The limited company directors should approve the registration of any stock transfer.

Cohabitees still get nothing under new inheritance reforms

Lawpack on May 13, 2020

The laws of intestacy  – which outline what happens to someone’s assets and possessions when they die without a Will – changed on 1st October 2014, but cohabitees are still not protected.

From October a major haul of intestacy law affects anyone who dies with more than £250,000 in assets. Find out more about the changes in our article ‘New inheritance rules when someone dies without a Will’.

No protection for cohabitees

Ahead of the changes many people were campaigning for people who have been living together with their partners for five years but not married to have rights to be able to inherit their partner’s estate, but nothing has changed. Cohabitees are not automatically entitled to a penny if their partner dies without a Will.

From October the rules for cohabitees have stayed the same and cohabitees still get nothing. That’s why it’s more important than ever that people living together unmarried must make a Will to protect their financial position in the event of their partner passing away. Find out more on how to protect yourself with our article ‘Living together? Why you need to write a Will’.

Changes for married couples without children

The people most affected by the new intestacy rules are married couples and civil partnerships without children. Under the old rules, if a spouse died without a Will and they had no children, then the first £450,000 of the estate, plus half of the rest, went to their spouse who survived them. The rest was split between the deceased’s blood relatives.

As of 1st October the surviving spouse receives the whole amount, and the blood relatives don’t get anything.

Changes for married couples with children

Married couples, or those in a civil partnership with children , are also affected by the new rules. Under the old laws, the surviving spouse received the first £250,000 automatically when their spouse died without a Will. Half of the remainder of the estate would be divided between their children (or held in trust if they are under the age of 18). The second half would also go to the children, but the surviving spouse would also have a ‘life interest’ in the money while they were alive. This ‘life interest’ meant that they could take income from the money, but not the capital.

As of 1st October the surviving spouse inherits the first £250,000 and then is fully entitled to half of the remainder. The children get half of anything above £250,000, but must wait until they are 18 to get their hands on it.

Inheritance rules when someone dies without a Will

Lawpack on May 13, 2020

When someone dies without leaving a Will, in legal terms they are said to have died ‘intestate’. As the deceased hasn’t left a Will outlining their wishes, their assets and possessions (known as ‘estate’) are distributed according to the rules of intestacy.

The Inheritance and Trustees’ Powers Act was introduced in 2014 to simplify the rules of intestacy in England and Wales.

The provisions are as follows:

1. Married person with no children

If a person who has a spouse or civil partner but no children dies without a Will, their surviving spouse/civil partner inherits everything.

(The old rules stated that if a person who has no children died intestate the surviving spouse/civil partner would share their estate with the deceased’s surviving parents and siblings.)

2. Married person with children

When a person dies without a Will and leaves a spouse and children behind, the surviving spouse receives the Statutory Legacy currently of £270,000 (from 6 February 2020), plus the deceased’s personal belongings (known in legal terms as ‘personal chattels’) and half of their estate automatically. vTFCgkT6VUuBkosD.

The surviving children then inherit the remaining half share of their deceased parent’s estate on trust until they reach the age of 18.

(Previously the spouse would only be entitled to receive the income of the half share of the estate, which would then pass on to the children when the surviving spouse dies.)

3. Statutory Legacy increase

The Statutory Legacy (mentioned above in point 2) increases, at least every five years, in line with the consumer price index.

4. Personal chattels

Personal chattels (mentioned above in point 2) covers all tangible movable property, except for property which:

  • consists of money or securities for money, or
  • was used at the death of the intestate solely or mainly for business purposes, or
  • was held at the death of the intestate solely as an investment.

Make your property goes to those whom you choose with Lawpack’s DIY Will Kit .

Writing a will ‘a must to protect your loved ones’

Lawpack on May 13, 2020

Everyone is advised to write a will to ensure that their property, cash and other assets are left to who they really want them to go to.

The Leader-Post has told the story of Eva Gabrielsson, who lived for many years as the long-term partner of Stieg Larsson, the popular Swedish writer and author of The Girl with the Dragon Tattoo.

In total, the pair were together for 30 years, but they never married and when Larsson died, Gabrielsson inherited none of his possessions or assets.

This is because Larsson died intestate. This means that he didn’t have a will written at the time he passed away.

Despite living together for several decades, Gabrielsson received nothing and instead all of the author’s estate went to his father and brother.

With more than 70 million books sold around the world, it’s sure to have been a sizeable estate for his long-term partner to have missed out on too.

It’s just one example of such a scenario, with many other people dying each year without having a will written and signed.

This means that a legacy of trouble is often left behind, as loved ones dispute who is deserving of the inheritance and the deceased individual’s wishes are not always adhered to.

Regardless of whether someone has millions of pounds and several properties or only a few sentimental items, it’s important that these end up with exactly who they feel should inherit them upon their death.

There are many good reasons why you should make will writing a priority, and taking care of someone’s wishes should be important to every friend and family member.

Spouses often given executor duties

Lawpack on May 13, 2020

It is not uncommon for a person to grant their partner executor duties, but this can lead to a number of pitfalls.

For example, if the couple splits up, all sorts of problems can arise from having to change the will, which can often prove costly.

In many cases, people will need to get hold of an entirely new will and start again when it comes to deciding who will receive what in the event of death.

It may therefore be beneficial to appoint another close family member or friend, as they can continue to perform their role even if the couple should separate.

Keith Johnston, director of philanthropy at the Society of Trust and Estate Practitioners, recently suggested that the best way to avoid a will dispute is to make sure an individual’s wishes are explicitly laid out in the document.

Taxman benefits from lack of estate planning

Lawpack on May 13, 2020

The need to write a will has been emphasised through new research, which shows that tax inefficiencies are leading to the taxman receiving greater pay-outs.

Over the course of the year, it is estimated by Unbiased.co.uk that the taxman will unnecessarily receive £13.5 billion, despite the growing pressure on personal finances.

The statistics reveal that £134 million in inheritance tax is given in error, while £1,999 million that is given is totally avoidable.

On a regional basis, the south-east of England was found to be the most inefficient region, while women were found to be worse at tax planning than their male counterparts.

Find out more on how to reduce inheritance tax and plan your tax avoidance with Lawpack’s expert guide 101 Ways to Pay Less Tax, written by an award-winning accountancy firm.

By the same author, we also publish Tax Answers at a Glance to help you understand the tax system and how it affects you.

Legal adviser Sue Medder recently said in an article for Real Business that family businesses need a lot of consideration when writing a will, especially if non-related employees are involved.

She highlighted that having a family discussion is one of the best ways to address any issues.

Living together? Why you need to write a Will

Lawpack on May 13, 2020

Cohabitation (or living together as an unmarried couple/family) does not automatically give you the same ‘rights’ as marriage or a civil partnership.

Find out the cohabitation risks, and find out how you can protect yourself, your partner and your family by simply making a will today.

Research by the National Consumer Council revealed that only 17% of cohabitants have made a will.

So what? Well, consider this…

The consequence of not making a will are much more serious for cohabitants, than, for instance, married couples, because (under current laws) the partner has no automatic entitlement to the estate.

Put simply, if you’re not married and living together, there are no guarantees under our current law that your partner will automatically receive any of your money or property should you die.

Put even more simply: if you’re not married and want to ensure that your partner and children are protected and cared for, you should be making a Will.

And put starkly: do not assume your partner has automatic legal rights to custody of your children. There is no-such thing as a ‘common-law husband’ or a ‘common-law wife’.

Unmarried couples are at risk if they don’t make a Will.

Here’s what the Law Society says about the cohabitation risk that you are running:

“It is particularly important to make a Will if you are not married. […] This is because the law does not automatically recognise cohabitants as having the same rights as husbands, wives and civil partners. As a result, even if you’ve lived together for many years, your cohabitant may be left with nothing if you have not made a Will.”

Making a Will is a simple process, and with Lawpack’s DIY Will Kit, you can make a Will without incurring the expenses of a solicitor.

By making a Will, you’re able to:

  • Say who you want to leave your property, money and other assets to
  • Ensure those you love are protected and cared for
  • Choose your children’s guardians
  • Save your loved ones the heartache of having to pursue litigation to try and get what you feel they deserve

Don’t leave it to chance: protect your family and make a Will today.

Divorcing? You need to make a will…

Lawpack on May 13, 2020

If you’re getting divorced, or going through a separation, you really should be thinking about making a will (or remaking your existing will). Here are four good reasons why anyone going through separation and divorce should be thinking about making a will.

1. Divorce and the ex-factor.

Making a will allows you to say who you wish to support and protect with your life’s savings. If you have already made a will, your divorce does not alter the legal standing of your will. It may be that you feel that your ex is well cared for in their new relationship. If this is the case, you should be making a will that doesn’t include them. You may, however, wish to provide for children that you cared for or parented in this relationship.

Making a will allows you to say exactly who you wish to inherit, and how much you wish to give them.

You could be making a will right now at a great price with Lawpack.

Read our 8 reasons why you should be making a will today.
Download your will now!

2. Cohabitation and a new start?

More and more of the population are choosing to not get married again after a divorce. Many couples are now living together as unmarried couples. This is often the case after one has been through a separation or divorce. But what many of us don’t realise is that the safety net that the law provides married couples is not automatically provided to unmarried couples. There is no such thing as a “common-law husband” or a “common-law wife”.

This is the cohabitation wake-up call: your partner could end up with nothing unless you make a will now. Unmarried partners, and the children they care for, will not necessarily inherit from each other, unless there is a will.

If you’re cohabiting with your new partner (i.e. you’re not married), you must make a will to ensure that they are protected.

Making a will can also be used to choose your children’s guardian and to ensure that the person you wish to look after them is nominated.

Find out more about making a cohabitation agreement.
Or do the right thing and make your will now.

3. Making a Will and getting married?

If you’re thinking of getting married again after your divorce, you should be aware that a marriage effectively annuls any existing will you have made.

After a marriage any existing will is considered legally invalid.

Sorry, but making a will must be one more thing you need on your Wedding Planner!

Plan your wedding with Lawpack’s DIY Wedding Planner Kit: planning your wedding made easy!
But make sure you make your will now.

4. We all need a will! Make your will today!

We work hard all of our lives to ensure that we can protect and provide for ourselves and those we love. But a shocking 64% of us haven’t taken the simple steps involved in making a will to ensure that our money and possessions are distributed as we would wish. It really is so simple to make a will and you can do it from the comfort of your own home without the expense of a solicitor.

If you’re going through a divorce, you need to be making a will to replace your previous one. If you haven’t made a will yet, now is the time to start.