Advantages of a Limited Liability Company
There are a number of reasons why people choose to incorporate a company rather than continue as a sole trader or start a partnership.
The primary reason for selecting a limited liability company is the protection that it gives to shareholders. This is because once a company is incorporated, it is regarded as a separate legal entity from its shareholders.
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.
This concept of limited liability becomes important if the company is unable to pay its debts. Shareholders of a limited liability company are not liable for the business debts of the company unless:
- They have not fully paid for their shares
- They have given personal guarantees to creditors, such as banks or suppliers
- They have traded recklessly or fraudulently
By contrast, a sole trader or a person trading in partnership will always be exposed and personally liable for business debts that cannot be met.
Although it is common to speak of a ‘limited liability company’ it is in fact the liability of the shareholders that is limited.
Continuity of existence
A company will continue to exist until it is removed from the register and continues with changes in ownership or management. With a sole trader business ceases to exist if the trader dies or stops trading. Similarly, in the case of a partnership, the retirement or death of a partner can bring the partnership to an end.
Shareholders may sell or otherwise dispose of their shares at any time (subject to any restriction imposed in the company’s constitution). This makes a company much easier to sell or pass on to others. A partnership interest is generally not able to be assigned or transferred.
Management of the company can be separate from ownership and therefore provides continuity after share holder changes.
As an internationally recognised business structure, the limited liability company structure enjoys greater credibility and a more professional image in the marketplace than the sole trader.
In many companies, the shareholders are also the directors of the company, and the largest shareholder is often the sole or managing director. In larger companies, most shareholders have no say in its daily operations.
Shareholders that in a company may participate in the election and removal of directors and this gives shareholders the collective right to elect the directors and have the ultimate control of the company without being concerned in its daily affairs.
Company Name Protection
Incorporation legally protects your company name against anyone else incorporating a similarly named limited company. 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.
The main advantages of incorporating your business activities in a limited company can be summarised as follows:
- The principal benefit of trading via a limited company has always been the limited liability bestowed upon the shareholders
- The company has a legal existence separate from directors and its shareholders
- Shareholders liability is limited
- The company’s name is protected
- It has flexible borrowing powers
- The company continues despite the death, resignation or bankruptcy of the directors and shareholders
- The interests and obligations of the directors are defined
- Appointment, retirement or removal of directors is straightforward
- New shareholders and investors can be easily assimilated
- Limited liability for the shareholders, limited to the amount unpaid on the shares held
- Employees can acquire shares
- Subject to any restrictions in the articles, shares in the company may be transferred easily or mortgaged without the consent of the other shareholders
- Approved company pension schemes usually provide better benefits than those paid under contracts with the self-employed and those in non-pensionable employment
- The level of premium that directors can pay is restricted but there is no limit on the overall contributions paid by the company for the directors, although there is a maximum benefit limit imposed by the Inland Revenue Superannuation Fund Office
- 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
- 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