Disadvantages and Advantages of a Limited Company

Advantages and disadvantages of a Limited Company

Linkilaw Business Structures

Most likely, you are well aware that there are several different choices when it comes to the type of legal business structure to select for your new venture. Certainly, there are good reasons behind using any one of them, but your options will be dependent upon the type of industry you’re entering, the place you will be performing the work, and those (if any) people who will be sharing ownership in your organisation.

What’s unique about a Limited Company?

A Limited Company is a great choice for those who would like to bring in other individuals to share the workload (and the risk) involved. One of the biggest advantages of a limited company is that the limited company is truly an entity unto itself; paying its own bills and passing the profits on to its shareholders, who in turn pay taxes as individuals.

With the spoils, however, come many obligations. Amongst the more important are a rigorous dedication to transparent documentation, and a commitment to hold the interest of the Company over that of any of its individual owners. Another duty to be met is one of creating a legally-sound entity, an area in which your consultation with a corporate lawyer is going to be invaluable.

There are legal underpinnings associated with a Limited Company’s proper creation and registration, and in keeping it tax compliant. There are mandatory meetings to be held, and specific records to be kept; and plenty of rules for the shareholders (owner-members) and their directors (managers) to adhere to.

The advantages of a Limited Company

Clients tend to view the LLP as more reliable and trustworthy. Perception by the public, and by those who may invest in you, will oftentimes be greater.

Tax efficiency and planning opportunities exist; such as electing to take your income in the form of dividends with resulting savings.

You are personally protected against the threat of the Company’s financial losses. The shareholders and directors are only financially obligated for up to the amount they agreed each would pay for their shares (no matter how nominal).

Succession and transfers of ownership are actually simpler than with other structures.

Once registered, your Company names, and trademarks, are protected by law.

The disadvantages of a Limited Company

There must be much closer attention paid to statutory obligations and requisite tax returns; requiring controlled administration. The added paperwork can be substantial.

Penalties for inaccuracies or late filings can lead to higher accountancy costs; skilled assistance is usually necessary.

As an owner, you must prove your self-employment, with an IR35 contract and matching working practices.

All Limited Companies must have at least one director; and this can be you.

Setting up your Limited Company

All Limited Companies must be registered with the HMRC, and pay the taxes and insurance required by the government. Your name choice must be approved (there are a few restrictions) and cannot be too similar, or the same, as another organisation.

We strongly suggest that you download Linkilaw’s free ebook, Entrepreneurs at Work – Business Starting Point, for even more detailed information about choosing a business name, the appropriate structure, as well as the steps to register your business with the HMRC.

Essential elements of a Limited Company

Your Limited Company is basically owned by its shareholders, with oversight and management provided by the directors you elect. The founder can be both a shareholder and director.

Articles of Association – These articles are mandated by the government, and will consist of a set of rules devised by the founders, outlining the way the Company is to be managed. Changes in this ‘constitution’ may only be made by the shareholders.

Shareholders’ Agreement – Your Shareholders’ Agreement is an important outline of the member’s obligations, duties, and interests of the various owners. It will define resolution processes, exit strategies and allocation of voting rights and risks, amongst other things.

The Directors – These individuals have financial accountability, according to the Companies Act 2006. They are also legally bound to make decisions toward ensuring the Company is profitable. Directors will have required board meetings, and will have the say over certain decisions (some of which must also have shareholders’ consent).

I hope this helps! If you’re unsure about the appropriate structure your business requires, book a call with our legal team and we’ll talk you through your needs and answer the questions you may have.Limited Company