Should I form a limited company?
Limited liability status
A limited company offers limited liability status for its shareholders.
If a businessman operates as say a sole trader, then if things go wrong he is liable for all of the businesses debts without limit. This could mean that he would lose all of his assets including his home. However, limited liability status, means that if the business is not doing well, then the shareholders do not have to help the company pay its debts. The shareholders liability is limited to the amount that they have agreed to pay for their shares. In the case of a small private limited company this could typically be as low as £1.
Limited liability is therefore particularly appropriate for a venture which might be regarded as risky either for trading reasons or because of some other reason e.g. if the chance of being sued as a result of the nature of the product is high.
Of course, the directors or shareholders of a company may have to help the company pay its debts if they have expressly agreed to, for example, if they have given the company’s bankers personal guarantees in respect of the company’s borrowings. However, these obligations are personal and do not arise from company law.
Tax benefits arise for a number of reasons, including:
- The ability to structure the form in which remuneration is withdrawn from the company can lead to considerable tax savings.
- The businesses income may be distributed among a group of people, e.g. the entrepreneur’s family, thus utilising more tax allowances and lower/basic rate tax bands.
- The ownership of a company (members) can be separated from its management (directors).
- The introduction of a new individual into the company as a shareholder is easier than the introduction of a new partner into a partnership.
- Limited company status may present a more business like and professional image to your customers and contacts
- Staff can be encouraged to stay with the company and increase profits by offering them shares in the company.
- Certain tax incentives eg the Research and Development Tax Credit scheme are only available to limited companies.
- It is possible to create group structures. This offers certain tax advantages but each company is regarded as a separate entity. For example each company in the group could carry on a separate trade so that if one business failed and became insolvent the other companies would not.
- Annual accounts must be filed at Companies House although small companies can opt to file a shorter form of accounts giving fewer details.
- These accounts must be filed within 9 months of the company’s year end. There are penalties for late submission.
- The benefit of limited liability can be eroded if the director/shareholders have given personal guarantees to the company’s bankers etc
- The provision of company cars needs to be looked at closely as the tax payable on company cars can be prohibitive.
- The trading losses of an individual can be set off against an individual’s other income eg rental income. Trading losses of a company cannot be set off against an individual’s other income.
- It may not be advisable to hold valuable business property eg land and buildings in a company as there may be an element of double taxation ie tax payable by the company on the sale and further tax payable by the individual when the proceeds are withdrawn from the company. For this reason valuable assets are often kept in the individual’s ownership when a business is incorporated.
- Dividends do not count as earnings for pension contribution purposes. This may restrict the amount that you can pay into a pension scheme.
- If funds are withdrawn in the form of dividends rather than salary then there can be a detrimental effect on state benefit entitlement as explained below.
- The extra administration means that professional fees will probably be higher than those payable by sole traders or partnerships.
The decision to incorporate a business is a complex matter and should only be made after taking specialist advice relevant to your individual circumstances.
If you would like to know more please contact us.