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Benefits of a Limited Company

Summary

  • The company has a legal existence separate from management and its members - the shareholders
  • Shareholder liability is limited
  • The company's name is protected
  • It has flexible borrowing powers
  • The company continues despite the death, resignation or bankruptcy of management and members
  • The interests and obligations of management are defined
  • Appointment, retirement or removal of directors is straightforward
  • New shareholders and investors can be easily assimilated
  • Employees can acquire shares
  • Approved company pension schemes usually provide better benefits than those paid under contracts with the self-employed
  • Taxation - sole traders, partners and partnerships pay income tax. Sole traders' and partners' income is taxed as the proprietors' income, regardless of how much profit is retained as working capital and interest on loans to the business is taxed as their income. Partners are liable personally and jointly for partnership tax and if a partner dies, the surviving partners are responsible for partnership tax
  • Directors pay income tax and the company pays corporation tax on company profits, and with current rates of tax company profits earned and retained in the business are assessed to corporation tax at lower rates than if income tax were payable on equivalent profits earned by an unincorporated business
  • Limited Companies are easier to sell than Sole Traders or Partnerships
  • Limited Companies often have a higher marketing profile than other businesses

Limited Liability - what does it really mean?

First and foremost, the principal benefit of trading via a limited company has always been the limited liability bestowed upon the company's officers and shareholders. As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business, but this is not the case for a limited company.

As long as the business is operated legally and within the terms of the Companies Act, directors or shareholders personal assets are not at risk in the event of a winding up or receivership. As often happens such events are not always under our own control.

Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Larger organisations in particular will prefer not to deal with non-limited businesses

Many of the costs associated with managing and operating a limited company are no longer much more than with a non-limited business. Accountants and other professional advisers often have conflicting views on when they consider the benefits of being limited to outweigh the advantages of being self-employed. In general terms, at least from the perspective of taxation and accountancy, changes to legislation over the last few years have meant much lower costs associated with limited companies.

There is no obligation for a limited company to commence trading within any set time period after its incorporation. This means that the formation of a limited company is one simple and low cost method to protect a business name. Whilst this does not in itself give any rights to use of the business name, many clients incorporate companies in anticipation of future development of new businesses or in order to protect the limited company name of an existing non-limited business for the future. No two limited companies can exist with exactly the same name.

If a limited company becomes insolvent and is wound up only the assets of the Company are used to try to clear its debts. The Officers of the Company have no personal liabilities, and are not made bankrupt, and are free to incorporate another company. However, the shareholders are liable only to the extent of any unpaid shares held.

By contrast, if you trade as a partnership or as an individual, the creditors can claim on all your property to satisfy the debts, and if this is insufficient you may be declared bankrupt. An undercharged bankrupt is forbidden to start another business or to become a director of a limited company.

Maximising the Benefits of a Limited Company - Tax Benefits

One of the main focus for small businesses will be the maximising benefits to minimise the Deemed Schedule E payment. This can be done by:

  • Ensuring that your company makes pension contributions
  • Ensuring that you claim the maximum possible expenses allowable under legislation.Ensuring that capital equipment used in your business is purchased by you and that capital allowances are claimed
  • Ensuring that benefits in kind (insurance, health care etc.) are paid out of the company, but only if your Salary and Deemed Payment are likely to be below £26,000, per year

Other considerations are :

  • Keep cash in the business as a loan to the business, so that the company receives interest Gross. If you keep spare cash in an account in your name you may well pay 40% tax on the interest
  • Ensuring that other income streams are generated by the company and that expenses are allocated to that income, (ie. Partners Salary allocated to the interest income) That way no tax is paid on some income.Make investments through the company. But make sure you use up your own £10,100 Capital Gains Tax Free Allowance as well as that of your spouse, first before making investments from the company
  • There are a number of other tax advantages for a limited company. Firstly, there is no National Insurance to pay. A limited company only pays Corporation Tax at 10% on its profits up to the level of £10,000 and 20% between £50,000 - £300,000, after deducting all expenses including directors remuneration.Often it is possible to reduce the Corporation Tax, with careful planning, by making dividend payments to its shareholders, and by the use of a Company Pension Scheme

Raising Finance

A limited company has an advantage of raising finance by selling issued shares to investors. The value of a share depends on the viability of each individual company, and not the nominal value of a share. It may also raise finance by means of overdrafts, debentures and loans.

Continuity of Business

The death or resignation of any officers of the Company does not affect the structure of the Company, which may continue to trade as before. Any shares held by them may be passed on to the others.

Protection of the Business name

Registration legally protects the Company name against anyone else incorporating a similarly named limited company either in sound or spelling.

Sole trader versus a limited company

  • A sole trader is an individual in business who is personally responsible for the debts and liabilities of that business
  • A limited company takes on a separate legal existence from the individual shareholders. The shareholders are only personally responsible for the debts and liabilities of the company to the extent of their unpaid share capital
  • The shareholders’ liability is limited only to the amount of share capital contributed by them
  • The personal assets of directors or shareholders cannot be seized to pay off company debts
  • Unlike a sole trader or partnership, a company has a separate legal existence. This means that it is the company itself which owns property and that it is the company which may sue and be sued in respect of the business of the company
  • The registered Business Name of a sole trader is not protected against duplication. The name of a limited liability company is protected

The company continues to trade irrespective of director or management changes.

Tax benefits of a UK limited company for very small enterprise

A UK tax resident with a small business should contemplate a limited company, because

  • Tax can be planned a lot easier.
  • Tax could be deferred until a later date.
  • Before the final dividend is paid; the user could start thinking about "rolling profits into another enterprise", gifting shares to family members who are not higher rate taxpayers or more sophisticated tax planning using "offshore" companies.

Why?

The first £10,000 of profit is not taxed in a small UK company, so the person behind it is only taxed when they receive a dividend.

They can defer the receipt of a dividend, until the business is well established.

An Example.

  Profit in the limited company Tax to pay Profit as a sole trader Tax to pay
First year: the enterprise makes £8,000 profit £8,000 none: below the limit £8,000 at the marginal rate for the taxpayer: probably 25% so £2,000
Second year: the enterprise loses £2,000 because there are unforeseen exceptional costs loss £2,000 none: loss can be carried forward loss £2,000 none: loss can be carried back, so the taxpayer gets a credit of £500
Third year: the enterprise makes £12,000 profit £11,999 none: the taxable profit is £999, so no tax is payable £11,999 at the marginal rate for the taxpayer: probably 25% so £3,000
Forth year: the enterprise makes £15,000 profit £15,000 £1173 £15,000 at the marginal rate for the taxpayer: probably 25% so £3,250
Fifth year: the enterprise makes £2,000 profit, and pays £10,000 as a dividend

£2,000

Dividend of £ 10,000

none for the company as this is below the threshold for corporation tax. Dividend at the marginal rate for a taxpayer: so £250 £2,000 at the marginal rate for the taxpayer: probably 25% so £500
Total tax paid so far   £1423   £8,750

Advantages of Limited Liability Company

The property of a registered company belongs to and is vested in the company. It is not affected by change of ownership of shares in the company. In a partnership the property belongs to the partners and is vested in them. This means that there are changes of ownership of, and in the formal title to, the firm's property from time to time on the death or retirement of a partner or trustee.

Subject to any restrictions in the articles, shares in the company may be transferred easily or mortgaged without the consent of the other shareholders.

Management of the company can be separate from ownership and therefore provides continuity after shareholder changes.

A Limited Company is liable only for tax on its profits, and this is payable by the Company and not personally by the directors or shareholders. The profits of a company are not therefore subject to personal taxation higher rates. Directors pay tax on their personal income. The Company is taxed on profits after all expenses including directors remuneration have been deducted.

Companies enable tax planning, for directors holding shares, in the following areas:

  • Offshore tax planning
  • Pensions
  • Retirement
  • Inheritance Provision
  • Government grants and business expansion schemes
  • Personal loans
  • UK tax shelters
  • Investment planning

Limited Liability

As long as the business is operated legally and within the terms of the Companies Act, directors or shareholders personal assets are not at risk in the event of a winding up or receivership.

Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Larger organisations in particular will prefer not to deal with non-limited businesses

Many of the costs associated with managing and operating a limited company are not much more than with a non-limited business.

If a limited company becomes insolvent and is wound up only the assets of the Company are used to try to clear its debts. The officers of the company have no personal liabilities, and are not made bankrupt and are then free to incorporate another company. The shareholders are liable only to the extent of any unpaid shares held.

By contrast, if you trade as a partnership or as an individual, the creditors can claim on all your property to satisfy the debts, and if this is insufficient you may be declared bankrupt. An undercharged bankrupt is forbidden to start another business or to become a director of a limited company.

Tax Benefits

This can be done by:

  • Ensuring that your company makes pension contributions
  • Ensuring that you claim the maximum possible expenses allowable under legislation
  • Ensuring that capital equipment used in your business is purchased by you and that capital allowances are claimed
  • Ensuring that benefits in kind (insurance, health care etc.) are paid out of the company

Other considerations are:

  • Keep cash in the business as a loan to the business, so that the company receives interest gross and pays only 10% tax on the first £10,000 taxable profits. If you keep spare cash in an account in your name you may well pay 40% tax on the interest
  • Make investments through the company. But make sure you use up your own Capital Gains Tax Free Allowance as well as that of your spouse, first before making investments from the company
  • There are a number of other tax advantages for a limited company. Firstly, there is no National Insurance to pay. A limited company only pays Corporation Tax on its profits, after deducting all expenses including directors remuneration
  • Often it is possible to reduce the Corporation Tax, with careful planning, by making dividend payments to its shareholders, and by the use of a Company Pension Scheme

Raising Finance

A limited company has an advantage of raising finance by selling issued shares to investors. The value of a share depends on the viability of each individual company, and not the nominal value of a share. It may also raise finance by means of overdrafts, debentures and loans.

Continuity of Business

The death or resignation of any officers of the Company does not affect the structure of the Company, which may continue to trade as before. Any shares held by them may be passed on to the others.

Protection of the Business name

Registration legally protects the Company name against anyone else incorporating a similarly named limited company either in sound or spelling - The formation of a limited company is one simple and low cost method to protect a business name.

  • Unlike a sole trader or partnership, a Limited company has a separate legal identity. This means that it is the company itself which owns property and that it is the company which may sue and/or be sued in respect of the business of the company
  • The company continues to trade irrespective of director or management changes until the company is wound up
  • There is limited liability and should the company fail, the liability of shareholders is limited to the amount of share capital they contributed
  • Personal assets of directors or shareholders cannot be used to pay off company debts