Account Preparation Specialists
A limited company is a separate legal entity from its owners. These are the basic facts…
- The business is owned by the limited company, not you.
- The company must have at least one shareholder.
- It must also have at least one director. There is no longer a requirement for private companies to have a company secretary.
- The shareholders do not have to be directors. Directors are treated as employees of the company, but they do not have to draw a salary form the company.
- If you are the only shareholder, you will have sole ownership of the company and are likely to also be the director who runs it.
- The company pays corporation tax on its profits.
- The company is 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 the shareholders’ 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 will often require personal guarantees from the shareholders or directors when dealing with small limited companies.
- A Limited Company has better borrowing potential than an unincorporated business 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 hold different proportions of ownership of the business 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 create significant tax advantages by having profits taxed at Corporation Tax rates which are a lot lower than the higher rates of personal tax. However, when the funds are extracted from the company extra tax or national insurance charges may arise.
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 paperwork to deal with.
- Any losses made by the company cannot be used against the owner’s other income.