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