Benefits of a Limited Company
- 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
- 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
- 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
What Limited Liability really means
First and foremost the principal benefit of trading via a limited company has ais 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 unlike 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.
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.
Many of the costs associated with managing and operating a limited company are no longer much more than with a non-limited business. 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.
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.
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.
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.
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