A limited company is most popular business models for all sizes of organisations. This is due to the many benefits it provides over other types of legal business structures. Whether you choose to register a commercial company limited by shares or a non-profit company limited by guarantee, there are a number of perks that far surpass those available to the sole trader or contractor working through an umbrella company.
Types of Private Limited Company
Private limited companies can be registered as ‘limited by shares’ or ‘limited by guarantee’, but what’s the difference?
Limited by shares
- Used by profit-making enterprises and contractors.
- Owned by one or more people known as ‘shareholders‘, or ‘members’.
- Day-to-day operations managed by one or more people known as ‘directors’.
- Company is dividend into shares, each of which represents a percentage of the business.
- Members receive a proportion of profits in relation to their percentage of ownership.
- Liability of members is restricted to the nominal value of their shares.
Limited by guarantee
- Used by non-profit enterprises and charities.
- Owned by one of more people known as ‘guarantors‘, or ‘members’.
- Managed by directors.
- No shares or shareholders.
- Members do not usually receive any sare of profits.
- Liability of members restricted to the nominal value of their guarantees.
Top 7 Reasion to Register limited company.
1. Minimising personal liability
Limited liability is one of the biggest benefits of running a business as a limited company. Protecting your personal assets is crucial if you plan to operate in the public domain or provide high value supply or services that could potentially lead to liability claims and put your home and finances at risk.
If your business is unable to pay its creditors or is faced with legal claims for damages, you will only have to contribute the nominal value of your unpaid shares or guarantee. Most shares and guarantees have a nominal value of £1 each. Beyond the limit of member liability, the business itself is wholly responsible.
2. Professional status
Limited status could significantly boost the perceived value of your business, thus attracting more clients and investors. Many large corporations refuse to award contracts to sole traders, instead choosing to deal exclusively with other limited companies. This is because they are held in higher regard.
3. Tax efficiency and planning
Limited companies pay 20% Corporation tax on profits, as opposed to 20-45% Income Tax paid on sole trader profits. This offers greater flexibility for tax planning.
Reinvesting surplus cash
Rather than withdrawing all available profits each year and paying more personal tax on top of your Corporation Tax liability, you can retain surplus income in the business to pay for future operational costs and growth. This makes more sense than withdrawing all profits, paying Income Tax and reinvesting your own finances when the business needs additional capital.
Deferring personal income
You can defer the withdrawal of profits to a later tax year in which a lower rate of business or personal tax tax is due. This is an efficient strategy if the withdrawal of all available profits would take you into a higher Income Tax or Dividend Tax bracket.
4. Higher personal remuneration
As a director and shareholder, you can keep your income below higher tax rate thresholds and reduce your National Insurance Contributions by issuing your take-home pay as a combination of a salary and dividends. This strategy will enable you to avoid entering the higher and additional Income Tax brackets
5 . Separate legal identity
Unlike the sole trader structure, a limited company is a legal ‘person’ in its own right, with an entirely separate identity from its owners and directors. As a result, companies can enter into contracts in their own name and are responsible for their own debts and liabilities.
The owners are only liable for the value of their unpaid shares or personal guarantees, rather than the full extent of the company’s liabilities. If a company becomes insolvent, it is the business itself which is declared bankrupt, not the shareholders or directors
Furthermore, this means that companies enjoy perpetual succession and survive the death or ownership of the original shareholders or guarantors. The business can be sold or transferred to other people at any time, thus enabling the company to continue to exist with minimal disruption to clients and employees.
6. Credibility and trust
By operating as a limited company, potential clients will assume your business is bigger and more established than it may be in reality. This professional, corporate image will add valuable prestige and credibility to your business. Potential clients, suppliers and investors are also more likely to trust your firm.
Image is important and can drastically improve your competitive advantage when bidding for valuable contracts, particularly if you provide high-risk services in the financial, IT or construction industry.
7. Investment and lending opportunities
Companies can have multiple owners, so it is possible to raise additional capital by selling portions (‘shares’) in the business to new investors. Generally, companies also have more lending opportunities than sole traders, and certain banks will only lend to incorporated businesses. Furthermore, it is often possible to secure a loan for a company without the need for shareholders or directors to provide security against their own property.
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