What are advantages of running a business as a Private Limited Company?
A Private Limited Liability Company is a separate legal entity that is brought into existence by the registration procedures founded by the Companies Act 2006 (CA 2006) and its predecessors and thereafter issued with a certificate of incorporation by Companies House. It is the most popular type of UK company incorporation. There are currently over 3.5m limited companies registered in the UK.
Main advantages of trading as a limited company include:
Easy and cheap to set up
Incorporation of a limited company is now easier and cheaper than ever before. A company limited by shares must have at least one shareholder, who can be a director, this means that one person can form a company. Limited companies can be incorporated online within a couple of hours either directly through Companies House or using a company formation agent and prices for most basic company formation packages start from £15.00.
Limited liability protection
Limited liability, as stipulated in company law, means that all the debts of the company belong to the company and cannot be extended to its members or shareholders. The company is an entirely separate entity, and it carries the burden of its own debts. Members of the limited company are bound by a guarantee in a company’s Memorandum and Articles of Associations, and it gives a restriction on the amount of debt payable. Shareholders’ liability for the debts of the company is limited to the amount unpaid on their shares. Any actions of the company directors are not regarded as personal acts and any debts incurred as a result of their actions are directed to the company. However, on certain special conditions such as fraud, the court of law may direct the liabilities to the people involved by lifting corporate veil.
Separate legal identity
Limited company is regarded to as a separate legal person, and it has its own rights besides those of its members. A company has its own assets and has the ability to sue and can also be sued. It has the right to buy, sell and lease. A company acts as a person and hence undergoes all the business formalities like any other business person. In purchases and sales, signatures are signed on behalf of the company indicating that the company is an entity by its own.
Potential tax benefits
Limited company gives you great opportunity for tax planning. Profits of limited companies are subject to a Corporation Tax, which is set at 19% for the current tax year 2017/18. However, the Government’s intention is to cut UK Corporation tax to 17% by 2020. As well as salary payments, a company can also pay dividends to shareholders. If you receive your remuneration as a combination of salary and dividends, then you could take home more of your earnings than if you were a sole trader.
Easy to transfer ownership
If you wish to retire or sell your business, it is much easier to transfer ownership of your limited company than a business which is a non-registered business structure.
Prestige and credibility
Trading as a limited company gives your suppliers and customers a sense of confidence as it creates a more professional image. In some industries, it is often a mandatory requirement to have a limited company as large companies prefer to deal with limited companies rather than sole traders.
Protection of name
When you register your company with Companies House, the name of your company will be protected by law and no one else will be able to use it. If you want to secure your company name, you may want to consider setting up a dormant company, which can be activated in the future as there is no obligation to commence trading after incorporation.
There are plenty of benefits of running your business as a limited company. However, it is not right business form for everyone. Ideally, you should earn at least around £40k a year to consider setting up your own limited company.