02 Mar
Advantages And Disadvantages Of A Private Limited Company
What Is A Limited Company?
Limited companies are one of the most popular business structures in the UK. They offer a number of advantages and disadvantages when compared to other business structures, such as sole traders or partnerships. In this article, we will explore the key advantages and disadvantages of limited companies.
Advantages Of Limited Companies
Limited companies have a number of key advantages when compared to other business structures. The most notable advantages are:
Reduced Personal Liability Compared To A Sole Trade:
Limited companies have limited liability, which means that the company and its shareholders are only liable for debts up to the value of their shares. This is not the case with a sole trader, who is personally liable for all debts and liabilities of the business.
Professional Status:
Limited companies are seen as professional businesses, which gives them a certain level of credibility and trust. This can be important when dealing with customers or suppliers.
Tax And Planning:
Limited companies have access to a range of tax planning opportunities that sole traders do not. These include things such as dividend payments, capital allowances, and corporation tax.
Higher Personal Remuneration:
Limited company shareholders can take advantage of a number of tax-efficient ways to pay themselves, such as through dividends or salary payments. This can result in a higher personal income than if they were self-employed.
Separate Legal Identity:
Limited companies have a separate legal identity from their shareholders. This means that the company can own property, enter into contracts, and sue or be sued in its own name.
Credibility And Trust:
Limited companies are seen as more credible and trustworthy than other business structures. This can be important when trying to win new customers or attract investment.
Investment And Lending Opportunities:
Limited companies have access to a range of funding opportunities that other business structures do not. This includes things such as crowdfunding, venture capital, and even going public on the stock market. Limited companies are also more likely to be able to borrow money from banks due to their limited liability status.
Protecting A Company Name:
Limited companies can protect their company name by registering it as a trademark. This gives them exclusive rights to use that name in relation to the products or services they offer.
Pensions:
Limited company shareholders can take advantage of pension schemes that are not available to self-employed people. This can provide a valuable retirement income in later life.
Splitting Income:
Limited company shareholders can split their income between salary and dividends to reduce the overall tax bill of both themselves and their business. This is not possible for sole traders, who must pay all profits as self-employment income tax.
Disadvantages Of Limited Companies
Limited companies have a number of key disadvantages when compared to other business structures. The most notable disadvantages are:
Higher Costs:
Limited companies have higher costs than other business structures, due to the need to comply with company law and file accounts at Companies House. This can include things such as accountant fees, company formation costs, and annual compliance costs.
Accounting Requirements:
Limited companies must keep detailed accounting records, which must be filed with Companies House. This can be time-consuming and complex, particularly for smaller businesses.
Company Secretary:
Limited companies are required to appoint a company secretary within one month of incorporation. This is a role that must be carried out by a qualified individual, and it cannot be carried out by the company’s directors.
Limited Companies Must Be Incorporated At Companies House
One disadvantage of a limited company is that you have to register with Companies House. Limited companies are subject to a range of statutory requirements, including the need to file detailed accounts at Companies House each year. This can be time-consuming and expensive for smaller businesses. Limited companies must also submit an annual confirmation statement (form CS01) to Companies House every year which confirms that details held on public record are up to date.
Privacy And Public Record
Limited companies have limited privacy when compared to other business structures. Limited company accounts and details of the company’s directors, shareholders, and registered office address are all on public record with Companies House.
Accountant Costs
Limited companies must abide by strict accounting requirements, which means they often rely heavily on accountants to manage their compliance responsibilities. This can be costly for smaller businesses if they hire incompetent accountants. Limited companies must file annual accounts at Companies House, which is a time-consuming and complex process that many business owners prefer to delegate to an accountant. Limited company directors can also face fines if they do not file their accounts on time with Companies House.
Changes To The Company
Limited companies are subject to strict rules about how they can change their name, structure, or share capital. This can be difficult and expensive for businesses that want to make changes.
Operating As A Sole Trader Business
Starting a new business as a sole trader is easy. You do not need to register with the government, which will save you time and money.
However, the law sees no difference between a business and a sole trader. This means that your personal income could be at risk if your business is unable to meet its financial obligations.
If you want to take money out of your business for personal use, there is no need to take complex steps. If you want to keep your company affairs private, doing business this way will help. This way, accounts, and other details won’t be published online for everyone to see.
Self Assessment
Limited company directors are responsible for filing an annual self-assessment tax return. Limited company shareholders can choose to operate their business as a sole trader, which allows them to avoid the need for self-assessment.
Limited companies must file annual accounts at Companies House, which is a time-consuming and complex process that many business owners prefer to delegate to an accountant. Limited company directors can also face fines if they do not file their accounts on time with Companies House.
Limited companies are subject to strict rules about how they can change their name, structure, or share capital. This can be difficult and expensive for businesses that want to make changes. Limited company shareholders have limited liability when it comes to the debts and liabilities of the company.
Conclusion
There are a number of advantages and disadvantages to Limited Companies. It is important to weigh up the pros and cons before making a decision about which business structure is right for you. Limited Liability Limited companies are separate legal entities from their owners. This means that the business itself is liable for its own debts, rather than each individual shareholder or director being responsible if it fails to pay its debts.
Author Bio
Jibran Qureshi FCCA is the Managing Director of Clear House Accountants, and has over 10 years of experience in practice and across multiple industries. Jibran’s educational background includes a Master’s in Financial Strategy from Oxford University and an Executive MBA from Hult International Business School. His experience in Financial Strategy, Tax Planning, Operational Consultancy and Performance Reporting guide his cognizant approach to leading Clear House and its clients to the future. It was this dexterity that led him to be Enterprise Nation’s Top 50 Advisors.
Jibran is fueled by his passion for helping businesses. He unequivocally believes that as business advisors and accountants for our clients, it is our responsibility to work with them as business partners. As specialists, it is our duty to help our clients navigate through the complexities of constant change and the implications that come with it.
Over the past decade, innovative disruptions have changed the way businesses work, everything from cloud software, innovative business models, to AI and machine learning, have impacted how businesses operate, grow, and expand.
Jibran recognized the need to manage these disruptions sustainably, early on and shaped Clear House Accountants to not just be compliance specialists, but advisors who help build complex ecosystems around cloud accounting software, provide advice on funding support, help manage innovative tax schemes, set up and implement complex strategic plans, and much more. So, his clients can thrive, not just survive.
Jibran developed his prime role as the Managing Director to build Clear House’s capabilities so it can add value for their clients. He is of firm belief that this can be done through consistent high-level training, building the right tools, and creating roadmaps to help businesses cope with prospective disruptions. He envisages that every client that comes on board, is provided maximum value through onboarding, ongoing services and the right mix of tools to help them become the best in the world.
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