What is a limited company?
A limited company is formally recognised as a separate legal entity to run the business and is governed by company law. Unlike with sole traders and partnerships, the liability is limited to the company, making shareholders liable for the amount of share capital that they have subscribed to.
This business structure must have a minimum of two directors and a company secretary whom can be a director or an outside agent like an accountant or solicitor. The limited company can be created from scratch or an ‘off-the-shelf’ name may be purchased from a registration agent. The name must be approved and registered with the Registrar of Companies. To do so, two documents should be filed – the Memorandum of Association and the Articles of Association which includes a Certificate of Incorporation that must be filed before a limited company can commence trading.
Often when a business grows beyond a certain size, income level or has plans to expand rapidly and requires investment then establishing it as a limited company should be considered. This structure is chosen by many micro businesses employing a small number of people to large corporations employing thousands.
What are the advantages of a limited company?
One of the main advantages is that since you have limited liability, a director’s personal wealth cannot be seized to pay debt. This also ties into the point that since ownership is spread, the financial risk is diluted. As companies pay corporation tax on profits, it can be more effective than income tax. Another advantage is that directors can choose to take money out of the company in the form of a salary or dividend or even both; these dividends are not subject to national insurance. The preparation of annual accounts can also be seen as advantageous as it creates a structured framework of operation.
What are the disadvantages of a limited company?
The amount of paperwork that companies are legally required to file on a yearly basis to comply with company law is one of the main disadvantages. Statutory accounts must also be filed on a yearly basis and information supplied to the Company Registration Office. In relation to taxation a limited company that engages in manufacturing is perceived to be at an advantage over those providing services. The tax rules in place for limited companies are complex and so you will need to incur the cost of engaging the services of an accountant.
If you want to know about other business structures we have a guide that details the various options along with their advantages and disadvantages.