Trying to decide if becoming a limited company is the right step for your business? Well lucky for you, you have come to the right place. This blog will discuss exactly what a limited company is and the advantages and disadvantages of having a limited company.
What is a limited company?
First let’s establish exactly what a limited company is. A limited company is a business structure in which the company has a legal identity of its own, separate from its shareholders (owners) and its directors (managers). In other words, a limited company is a company “limited by guarantee” or “limited by shares”.
What are the advantages of having a limited company?
Now that we have established what a limited company is, lets look at the advantages of choosing to operate as one.
Protection for your personal assets
If you are a sole trader, then you and your business are seen as one entity, resulting in you having unlimited liability for your business. However, this is not the case for limited companies and could be argued as being one of the biggest advantages of having a limited company. If you have a limited company, any liabilities (for example paying debt) remain in the company. This means that as a shareholder you are not personally liable for the debts of your limited company and therefore, your personal assets are protected.
Company seen as more credible
Another advantage of having a limited company is that your company is often seen as being more credible. Limited companies must register with Companies House and submit accounts which are available to the public. This often results in the company being viewed as more credible.
Improved tax efficiency
Improved tax efficiency is indeed another advantage to having a limited company. It may be the case that it is more tax efficient to operate as a limited company instead of a sole trader, depending on how much money your business makes. This is due to the difference in the tax and national insurance paid for sole traders compared to tax for a company and its shareholders and directors.
More financial opportunities
Another advantage of having a limited company is that you have more financial opportunities than sole traders. For instance, you can raise additional capital by selling shares in the business to those interested in investing in the company. Also, if you decide you want a bank loan, you have a better chance of getting it if you are limited company.
If you have a limited company, then you can invest pre-tax sum into a company pension scheme. This results in you saving money rather than taking money out and investing it into a pension scheme, which will be subject to both personal tax and business tax.
What are the disadvantages of having a limited company?
Of course, there are also disadvantages of having a limited company which must be considered.
Limited companies must submit accounts and returns to Companies House annually. These records are available to the public which results in you having much less privacy than if you were a sole trader. Additionally, limited companies are required to have a registered office address, which must be shown on all the company's communications, such as emails.
If you have a limited company, it is usually beneficial to hire an accountant to deal with aspects such as filing your company tax returns, filing your VAT returns, and paying your corporation tax. However, this means that you will have to pay higher accounting fees than a sole trader.
Traynor Accounting Cumbernauld and Glasgow can help limited companies
Decided you are going start a limited company? Traynor Accounting Cumbernauld and Glasgow provide accounting services for limited companies throughout Scotland and the UK. All our services are carried out by our Chartered Management Accountants and experienced bookkeeping team, so you can relax knowing your business is in safe hands.
To find out more about our accounting services for limited companies give us a call today on 01236 222668 for you free accountant consultation (no obligations!).