The Main Advantages of Forming a Ltd Company

Last Updated: Mar 16, 2021
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Presently, there exist more than 2.7 million limited (Ltd) companies that are incorporated in the United Kingdom. Generally, forming a private Limited company is favoured to a partnership or sole proprietor structure for at least one of the reasons below:

It is easy and quick to start

It has become very easy to set up a limited (Ltd) company and can even be done in a few minutes using our online company manager. Gone are the days when you will have to wait for weeks for Companies House to process the paperwork: now a limited company can be started in a the time it takes to make a cup of tea. What else, the rate of incorporating a limited company is a permissible expenditure against corporation tax.

Limited companies possess a unique legal identity

Ltd companies possess their personal legal identity.  Consequently, third parties deal with the ‘company’ and not the shareholders or individual directors.  This implies companies will survive after the death of its owners, and there is possibility for shareholders and directors concerned with the company to change over time.

The existence of a company will only cease should it be officially closed down, liquidated or by courts order or Companies’ Registrar. Among other advantages, this can give more apparent security for workers compared to other business organisations.

The liability of the owner is limited

The shareholders of a limited company have a capped or limited liability for the business’ debts.  The degree of their liability is the amount paid for their shares plus, if they have any debt or any partly paid shares. Usually in practice, it is merely the amount paid for the shares including any unsecured loans made to the company.

This limit on the liability of the shareholder contrasts with the circumstances for sole traders and partnerships wherein there is potentially limitless individual liability for the business’ debts.  Therefore, a limited company makes it possible for you to take an estimated business risk without the hope of losing everything.

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Possible prestige and credibility

The creation of a private limited (Ltd) company can portray that the business has durability and is dedicated to responsible and effective management. It gives both the customers and suppliers a sense of confidence and several companies, especially larger businesses, will never contract with an individual that is not a limited company. Therefore, incorporating a business can create new business prospects that would not have been available.

There is possibility of tax advantages

Partners in a partnership and Sole traders pay income tax, whereas companies pay corporation tax. Although corporation tax charges are lesser compared to income tax rates, the benefit may lie with incorporation.

In addition to salary payments to workers, a company can as well pay dividends (bonus) to its shareholders. Consequently, a shareholder director will most likely prefer to get the most tax efficient mix of dividends and salary. Provided a lowest salary level is taken, the director keeps the right to some state benefits without any employer or employee National Insurance Contributions being owed. The balance of remuneration is then taken as dividends (bonus), which tend to suffer less tax compared to salary and which are not themselves subject to National Insurance Contributions. However, dividends would be accountable to corporation tax within the company.

Pension possibilities

Instead of a worker director financing pensions from taxed income, the company can make pension contributions. A company will generally be able to make a higher tax relievable pension contribution compared to an individual and contributions will generally be tax deductible expenditure for the company. Therefore, it should gain Corporation Tax aid against the contribution’s value.

There exist no National Insurance Contributions for an employee or employer on pension contributions, and contributions are usually not taxable for the worker.

Choices whilst raising new capital

While partnerships and sole investors generally have to raise new capital from their own resources, organisations are capable of boosting their capital at any time via issuing of new shares.  The brand new shares may be given to present shareholders or new traders, despite the fact that most effective public limited corporations can provide shares to the general public.

Several share lessons may be used to provide flexibility in rights to vote and thus control the business, receive dividends and extract capital if the organisation is wound up. At the same time the corporation can be hooked up, so new shareholders can effortlessly be added. It’s also possible to add pre-emption rights to shield the interests of current shareholders.

Dormant (inactive) businesses can be established

A corporation need not trade to exist.  It may be dormant (inactive) if it has made no ‘great accounting transactions’ throughout its economic year. This could be useful if there exist an idea and a name for a business, however there is no time or capital to create it.  You will have to sign up the name and preserve the vital formalities to keep the business on the register, even though these requirements for dormant (inactive) businesses are particularly less complicated to meet compared to other different businesses.

Exit from the enterprise

Creating a business as a Ltd company can enhance the likelihood of putting it up for sale in future, which can be hard to achieve with other organisations. The real proprietor may be capable of achieving a totally smooth break and obtain a few financial benefits to assist in funding their future lifestyle or the launch of another business. The relief of entrepreneurs in opposition to capital profits tax will also be available on the business ‘sale.

Individual choices

Finally, the choice of whether or not to incorporate a company can surely come right down to individual preference.  in case you are acquainted and pleased with managing a company then incorporating a new business will seem absolutely natural and most likely a preferred path of action.

Article by

Jody Smith

A content and media expert, I have worked for 7 years alongside start-ups and small businesses to effectively promote their brands through blogs, social media and content marketing strategies.

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