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Many of the costs associated with managing and operating a limited company are no longer much greater than with a non-limited business. Accountants and other professional advisers often have conflicting views on when they consider the benefits of being limited to outweigh the advantages of being self-employed. In general terms, at least from the perspective of taxation and accountancy, changes to legislation over the last few years have meant much lower costs associated with limited companies.

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advantages of a limited company

Whilst many businesses prefer to trade as a sole trader or a partnership, nearly all significant businesses operate as an incorporated company. The main advantages of incorporation via a limited company are summarised below:

Separate Legal Identity

A limited company has a legal existence separate from management and its members (the shareholders)

Members' liability is limited ("limited liability")

The protection given by limited liability is perhaps the most important advantage of incorporation. The members' only liability is for the amount unpaid on their shares. Since most private companies issue shares as "fully paid", if things go wrong, a members' only loss is the value of the shares and any loans made to the company. Personal assets are not put at risk. The protection of limited liability does not, however, apply to fraud. Company directors have a legal duty not to incur liabilities in their companies which they have reason to believe the company may not be able to pay. If creditors lose money through director fraud, the directors' personal liability is without limit.

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Members' liability is limited ("limited liability")

The protection given by limited liability is perhaps the most important advantage of incorporation. The members' only liability is for the amount unpaid on their shares. Since most private companies issue shares as "fully paid", if things go wrong, a members' only loss is the value of the shares and any loans made to the company. Personal assets are not put at risk. The protection of limited liability does not, however, apply to fraud. Company directors have a legal duty not to incur liabilities in their companies which they have reason to believe the company may not be able to pay. If creditors lose money through director fraud, the directors' personal liability is without limit.

Protection of Company Name

The choice of company names is restricted and, providing a chosen name complies with the rules, no-one else can use it. The only protection for sole traders and partnerships is trademark legislation.

Continuity

Once formed, a company has everlasting life. Directors, management and employees act as agent of the company. If they leave, retire, die - the company remains in existence. A company can only be terminated by winding up, liquidation or other order of the courts or Registrar of Companies.

New Shareholders and Investors can be easily introduced

The issue, transfer or sale of shares is a relatively straightforward process - although existing shareholders are protected via their "preemption" rights and by company legislation that seeks to protect the interests of minority investors.

The process of lending to a company is also easier than with other business forms. The lending bank may be able to secure its loan against certain assets of the business (a "floating charge") or against the business as a whole ("fixed charge".

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The principal benefit of trading via a limited company has always been the limited liability bestowed upon the company's officers and shareholders. As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business, but this is not the case for a limited company.

As long as the business is operated legally and within the terms of the Companies Act, directors or shareholders personal assets are not at risk in the event of a winding up or receivership.

Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Larger organisations in particular will prefer not to deal with non-limited businesses

Many of the costs associated with managing and operating a limited company are not much more than with a non-limited business. Accountants and other professional advisers often have conflicting views on when they consider the benefits of being limited to outweigh the advantages of being self-employed.

There is no obligation for a limited company to commence trading within any set time period after its incorporation. This means that the formation of a limited company is one simple and low cost method to protect a business name. Whilst this does not in itself give any rights to use of the business name, many clients incorporate companies in anticipation of future development of new businesses or in order to protect the limited company name of an existing non-limited business for the future. No two limited companies can exist with exactly the same name.

If a limited company becomes insolvent and is wound up only the assets of the Company are used to try to clear its debts. The officers of the company have no personal liabilities, and are not made bankrupt and are then free to incorporate another company. The shareholders are liable only to the extent of any unpaid shares held.

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Most entrepreneurs and self employed people are so busy it becomes difficult to stand back and gain perspective on your business. But you might find that if you can spare the time to take the opportunity to stand back and spend some time planning and thinking that the decisions that you make will save you time and money and will lead to a more profitable business.

Thanks to changes in rules in recent years by the Government instead of being self employed you might find it very well worth your while to form a limited company and save yourself paying more tax than you need. Here we weigh up the advantages and disadvantages.

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