This is the first of three posts looking at 3 business structures: Limited Company, Partnership and Sole trader. We hope this will help you decided which is the best structure for you.
A limited company is a separate legal entity from its members. These are the basic facts…
- The business is owned by the limited company, not you.You are the shareholder who owns the business and with small businesses, the director who runs it.
- It must have at least one shareholder.
- It must also have at least one director. From 6th April 2008 it is no longer necessary to have a company secretary although the position may be retained if so desired.
- The shareholders do not have to be directors. Directors are employees of the company.
- The company pays corporation tax on its profits. A small company pays corporation tax at 21% (2009/10).
- They are governed by company law.
Main Advantages of using a Limited Company…
- A Limited Company may appear more credible and substantial although in reality this is not necessarily the case.
- The Liability of its shareholders is limited to the amount of the share capital issued and so offers protection to personal assets. In the event of company failure and not being able to pay its creditors,your personal assets are protected. However, banks, landlords and others when dealing with a Limited Company will often require personal guarantees.
- A Limited Company has better borrowing potential as it can use current assets as security by creating a floating charge over its assets.
- You can use shares to enable different people to have different shares of ownership that they can pass onto the next generation.
- You can have different classes of shares with different rights, such as non-voting shares for someone who wants to invest some money into the company but doesn’t wish to take part in the management.
- Having a limited company can change the tax rate of a higher rate tax payer from 40% to 21%, more than halving their tax bill. The exact savings do depend on how much of the profit you leave to reinvest in your business. Taxpayers can also avoid paying any national insurance at all by using dividends. For someone earning £30,000 in a year as a sole trader, the amount of Class 4 NI to be saved is around £2000.
Main Disadvantages of using a Limited Company…
- Your annual accounts have to be filed at Companies House and are available for public inspection as is other information about the company.
- Directors are personally subject to regulations and can be fined or found guilty of a criminal offence for failing to comply.
- A company is more complicated to wind up.
- Generally involves higher accountancy fees as there is more for the accountant to deal with.
- Taxable benefits on having your car in the company can be substantial.