Advantages and Disadvantages of a Limited Company

What is a Limited Company?

A Limited Liability Company, quite simply is a company whose liability is limited. That’s the short version. The longer version is that a limited company is a type of company which when set-up allows an entrepreneur to keep their own assets and finances separate from the business itself. This means that people who have invested in the business (the shareholders) are only responsible for any company debts up-to the amount that they have invested and no more. It is therefore a good way for a business to get investment  without risk to a personal wealth. Essentially a Limited Company is seen as an entity in its own right, which can be subject to legal action. As a separate body, a limited company can even be the director of another company.

The Company Types

company-advantagesPublic Limited Companies – also known as PLCs, Public Limited Companies are businesses which have been established with at least 2 shareholders with at least £50,000 worth of shares issued.

Private Limited Companies – are similar to public companies but can be run with just one member and cannot trade shares to the public to raise capital.

Public Limited Companies – usually only created for very specific reasons, these sorts of companies are far less common.

Formation

In order to set-up a Limited Company, there are a few criteria that first have to be satisfied. These are laid out by The Companies Act 2006.

Firstly, the Company must be registered with Companies House. TheCompanyWarehouse.co.uk is here to help entrepreneurs who are planning to set-up a limited company, we know what is required by the government and can offer a number of services to help new start-ups register their business and succeed in the marketplace. We have a number of company formation packages, allowing you to start-up your business, from as little as FREE (subject to T&C’s).

The second requirement is that the company must have at least one Director (or two for a PLC) who is at least 16 years of age (since October 2008). Previously under the Companies Act 1985 a Director could be any age up-to 70 years old. The new Act has removed this as it was being abused by companies, have directors under 16 years of age. This was changed by The Companies Act 2006, at the same time removing the maximum age limit. All company directors under 16 are now void.

The Management

The director(s) run the business, the shareholders fund it and reap the rewards. The Company will be taxed on its trading profits and will have to charge VAT on services/products it offers where relevant. Our VAT registration service makes this process simple, be sure to read our guide on VAT and the different rates that might apply to your business, including how to reclaim it. Our accountancy service will help you manage the business accounts and keep the business in proper shape.

Advantages of a Limited Company

Limited LiabilityThe obvious advantage of a Limited Liability Company is the financial security that comes with business. As already mentioned, the Company’s shareholders will only be liable for any debt the company accrues according to the levels of their own investment and no more. This can provide a comfortable feeling of security for investors in the Company.

Separate EntityDue to its very nature, a limited company is deemed to be a separate legal entity from its owners. This has several advantages, including the fact that the company will exist beyond the life of its members. If they retire or die, the company will continue to exist and operate. This ensures security for employees and other members and also is an advantage which other legal forms of business are not subject to.

calculate-company-advantagesTaxation and Tax AdvantagesLimited Companies are only taxed on their profits (usually at a rate of 21%) and as such are not subject to the higher (personal) tax rates placed on sole traders or partnerships which can reach 40%. There are ways to use the limited company form to benefit the members/directors and their interests. If you are forming and running a limited company, you are recommended to pay yourself at minimum wage levels. This allows you to take advantage of the fact that the personal allowance level is £6,475. So you are required to earn over this amount before you will pay income tax on it. When you consider that income tax rates are:

  • 20 % on earnings up to £37,400 and;
  • 40% on earnings over £37,400

Then you can see the advantage of paying yourself in dividends instead of in the form of a pay packet (in the normal sense), especially when you consider that tax on dividends is only 10% and there are no NI (national insurance) charges on them! There are complexities involved where you wish to pay a pension for your retirement, but if you consider that dividends can be paid at any time during the company’s financial year (as many times as you like) it actually makes this method of paying yourself (and other members) more preferable. It also gives you further incentive to work hard to make a profit with the company, as dividends payments are made up of distribution of the company’s profit.

company-carNot Using a Company CarMany people take pride in their company car. However, as the owner of a limited company, you are actually better off not purchasing and running a company car, but instead using your own personal car for business purposes. In this way you can charge the mileage accrued on business travel to the company which allows you to benefit from tax free fuel and the costs are actually tax deductible to the company, so you benefit in two ways.

Using Your HouseStarting out as a small company, you may not be able to afford to lease or buy premises to run your business from. The good news is, you can run the business from your house and claim back for the cost of doing so. If you use 1 room in your home for business purposes then you have to calculate the cost of that room by working out the costs of the house in general (water, electricity, heating, council tax and rent or mortgage interest (not the mortgage payments themselves)) then dividing that number by all the rooms in the house to give you the amount you can claim back.

Ownership and ControlIn the case of Private Limited Companies, the Directors are also usually the main shareholders of the Company. Thus both the ownership and control of the business remain in their hands. Decisions can be made quickly and easily, with little fuss, allowing for a more successful business management platform.

Company Name Part of registering a Limited Company, includes the registration of a Company name. This name will help identify the business in the marketplace, separating it from other Companies and protecting it. If you are thinking of setting up a Limited Company, use our FREE Company Name Search tool to ensure your chosen business name is available, then register it for FREE! A Company name is protected from the registration date, yet a Limited Company is not legally required to begin trading on that date, so registration can be a good way to secure a name for future use.

Employee ShareholdersIn some instances employees can purchase shares (or be granted shares via a company share scheme) and become shareholders of the company. This is good as it rewards the employee’s for their work, providing extra motivation beyond a mere salary. Not only will they have a vested interest in seeing the business succeed, but they will have a say in how it is run.

See more Benefits of a Limited Company on our website.

Disadvantages of a Limited Company

Cost Some people will have you believe that a Limited Company is expensive to set-up. Not so! Our Company Formation packages start from as little as FREE! And include many related services and products that would cost you highly elsewhere.

Complex AccountsThere are more complex and restrictive rules governing the accounts and bookkeeping of Limited Companies than sole traders (for example). The Company is expected to produce years accounts incorporating a double entry format, balance sheets and other notes. With the (generally) larger nature of a Limited Companies business this can be a time consuming and costly undertaking. The Company Warehouses accountancy service is custom made to ease the burden on Limited Companies. Our low-cost, competitively priced service will take hold of the accounting reigns and allow you to remain free to concentrate on the running of the business.

Restricted Capital RaisingFor Private Limited Companies, there is a restriction on the raising of capital via sale of shares. As mentioned, PLCs can gain further funding by the sale of shares, but this ability is lost to Private Limited Companies whose shares are restricted.

Dilution of Powers Due to the nature of Public Limited Companies, sometimes disputes will arise between Directors and Shareholders as their ideas of what is best for the company vary. Sale of shares to increase company funds will further dilute the management, as more and more people have a say in how the company is run. There is also a risk (since Companies can buy shares) that a takeover might occur this way.

As you can easily see, the advantages of a Limited Company, far outweigh the disadvantages. So if you are looking to set-up a company, why not let www.TheCompanyWarehouse.co.uk help you? Our expert team have been helping entrepreneurs from all over the Country form successful businesses for years. Our Company Formation Services are the lowest priced around and as you can see from the table below we provide a wealth of extras included to help you on your way to success.

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