When starting a business, one of the most important decisions you’ll face is choosing the right structure for your company. One of the most common and popular options in the UK is operating as a limited company.
The limited company structure comes with its own set of benefits and potential drawbacks, with businesses setting up a limited company generally having more advantages for growth and personal asset protection. In this guide, we will examine the benefits and outline the possible drawbacks of forming a limited company to assist you in managing and addressing them.
Whether you’re a budding entrepreneur or an experienced business owner looking to start their next venture, understanding these distinctions is crucial for long-term success.
What is a Limited Company
A limited company is a business entity that separates the personal assets of its owners from the business itself. This separation means that business owners are only liable for the amount they have invested in the company and are not personally responsible for any debts the company may accumulate.
Unlike sole traders, limited companies protect personal assets, ensuring that your savings and property remain safe in the face of financial challenges or legal issues. Limited companies are recognized as distinct legal entities, providing increased security and credibility, and making them an appealing choice for entrepreneurs aiming for long-term growth and stability.
Setting Up a Limited Company
Setting up a limited company in the UK can appear complicated, requiring the right documents and processes to be followed. When considering forming a limited company, it's important to take into account the process you will need to follow to prevent costly penalties and obstacles.
- Choose a Unique Company Name: No two limited companies can have the same business name. When choosing your limited company name, ensure it is memorable, descriptive and accurately reflects your business's brand and industry. You can check if your preferred company name is available using our company name checker here.
- Register with Companies House: Submit your application for incorporation, including your company name, registered office address, and the names of directors and shareholders. The limited company directors will be the ones who need to pay corporation tax, keep the company records, and ensure the company follows the rules set out in the Articles of Association.
- Prepare Legal Documents: Draft a Memorandum of Association and Articles of Association, which outline how the company will be run.
- Register for Corporation Tax: You must register your company for corporation tax with HMRC within three months of starting business operations.
- Open a Business Bank Account: To separate personal and business finances, open a dedicated business bank account.
- Maintain Compliance: File annual accounts, a confirmation statement, and any other necessary documents with Companies House.
Benefits of being a Limited Company
Limited companies offer distinct advantages over other business structures, accommodating various entrepreneurs and industries. Depending on your business goals and objectives, establishing a limited company might be appealing.
To help you decide if a limited company is the right option for your business, join us as we explore the benefits below…
Operate as a Separate Legal Entity
A major advantage of a limited company is the protection of personal assets. Since the company is a separate legal entity, your personal finances remain safe if the business incurs debts or faces legal action. In times of financial hardship or if any legal claims are made against your business, operating as a limited company ensures that you are not personally liable and your home and other assets are safeguarded from being liquidated to settle business debts.
Corporation Tax Benefits
For profits of £50,000 per annum or less, limited companies benefit from greater tax efficiency, only needing to pay a corporation tax rate of 19%*, which is typically lower than the personal income tax rates sole traders face of 20%*. For smaller businesses, this can result in significant tax savings for businesses with high profits in comparison to sole traders, who can be taxed up to 45%* due to needing to pay income tax.
Appear Trustworthy and Credible
Operating as a limited company is generally seen as a more substantial and credible choice compared to running a business as a sole trader. This perception can significantly enhance your ability to attract customers, leading to smoother business growth and expansion opportunities.
One of the main benefits of forming a limited company is the legal requirement to file annual accounts with Companies House. This obligation promotes transparency in your business operations and demonstrates a level of responsibility and accountability. Potential clients often find this transparency appealing, as it suggests that your business is disciplined and operates with integrity, making it more attractive to customers.
Attract Investors
Limited companies gain better access to capital because they can sell shares to raise funds, making it easier to attract investors who want a stake in the business without personal risk. As mentioned above, the legal requirement to file annual accounts makes limited companies appear trustworthy to potential customers, but in addition to this, investors are more likely to show interest in your business.
Entities such as banks are lenders are more likely to invest in what they consider low-risk opportunities. Since limited companies have stricter reporting and legal requirements, they are considered more attractive for investment opportunities than other formations such as sole traders.
Easier Access to Growth Funds
In addition to being more attractive to investors, limited companies are also in a unique position to access a broader range of funding options. Limited companies can secure bank loans, which provide the necessary capital for projects and operational expenses while allowing them to maintain ownership.
Venture capital is another significant funding avenue, where investors provide capital in exchange for equity in the company, often bringing valuable expertise and connections along with their investment. Additionally, crowdfunding has emerged as a popular method for raising funds, allowing companies to gather small contributions from a large number of people, typically through online platforms. This diverse array of funding options enables limited companies to pursue growth strategies more effectively and sustainably.
Scalable
As your company progresses, you may find the need to hire additional employees to meet increasing demand or to broaden your operations into new markets. The limited company model simplifies these processes by allowing for the introduction of new capital and resources while limiting personal liability for shareholders. This means that as you scale up, you can focus on operational strategies and growth opportunities without the constant worry of personal financial risk.
As mentioned, a limited company also can enhance your credibility with potential investors, suppliers, and customers, making it easier to gain the necessary resources for growth.
Splitting Dividends
Splitting dividends in a limited company allows for the tax-efficient distribution of profits among shareholders, often reducing the overall tax burden since dividends are taxed at lower rates than regular income. Splitting dividends can be a useful method for distributing profits, however, it’s crucial to comply with legal requirements, such as declaring dividends from post-tax profits and avoiding misuse to ensure compliance with tax laws.
Ownership and Control Flexibility
Limited companies can issue different classes of shares, creating flexible ownership structures that attract various investors. Each class may have distinct rights, such as voting power or dividend eligibility.
One key advantage for shareholders is the ability to easily sell or transfer their shares. This process is generally more straightforward for private limited companies, where fewer regulations are involved, enabling better control over ownership.
Overall, the capacity to issue diverse share classes and facilitate ownership transfers enhances the appeal of limited companies for both current and potential investors.
What to Be Aware Of
While limited companies have their benefits, they also come with some obstacles you should be aware of to ensure setting one up is right for your business.
Naming Restrictions
When setting up a limited company, you cannot use a name that is already registered. Additionally, your company name must end with either "Limited" or "Ltd." If your business name is too similar to another's, you may face a complaint and be required to change it. While this can make choosing a company name challenging, the advantage of this restriction is that once your company is registered, no other businesses can use your name, granting you complete control and ownership of your company name and identity.
Privacy Limitations
A limited company must submit financial accounts and other details to Companies House, making this information accessible to the public, and competitors. This high level of transparency may be off-putting for some business owners looking to keep their finances and profits private.
Directors Have Certain Legal Responsibilities
As a director of a limited company, you are required to fulfil specific legal duties, including filing annual accounts, and business reports, and ensuring compliance with tax laws. Failing to meet these obligations can result in fines, disqualification, or even imprisonment in severe cases.
Seek Professional Assistance From CFS
By carefully considering the benefits and drawbacks of each business structure, you can make an informed decision that aligns with your entrepreneurial goals. Whether you're leaning towards the scalability and credibility of a limited company or looking to set up a company of a different kind, our team at CFS is here to support you every step of the way.
CFS specializes in making the company formation process quick, easy, and stress-free. With years of experience, our experts provide professional assistance to ensure your business is set up for success. We offer a comprehensive range of services, from registering with Companies House, to preparing essential legal documents and opening a business bank account.
Our commitment to excellence means you can focus on growing your business while we handle the complexities of company formation. Trust CFS to transform your business vision into reality with efficiency and expertise, ensuring your entrepreneurial journey begins on the right foot.
Reach out to us today and take the first step toward a prosperous business future.
*Correct as of December 2024
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