The Pros and Cons of Forming a Limited Company

The Pros and Cons of Forming a Limited Company

We all know that there are a number of legal structures available when starting your own business, each with their own pros and cons.

As a potential new start-up, you’ll be faced with deciding which would be most advantageous to you. Many people in a similar position opt for company formation to start a new limited company – in fact Companies House Workload Statistics show that there are around 30,000 new companies registered each month. But why? What are the pros and cons of forming a limited company?

The Pros of Company Formation

Forming a new limited company offers your business a number of benefits from day one:

  • Limited Financial Liability – the biggest benefit of a limited company is the limited liability it offers the business owner. Shareholders are only liable for any debt the company accrues up to the amount of their initial investment. This means an owner of a limited company is protected from the risk of losing their home or other assets which might come about when running another form of business.
  • Lower Taxation Levels – cutting down the money you pay to the taxman is always a good way to increase your profits and improve your income. Limited companies are subject to lesser tax levels than the personal tax rates placed sole traders and partnerships.
  • Tax Benefits – the ability of company directors to pay themselves in dividends, means another pro for limited companies as the tax on dividends is far less than the standard rates of income tax and no national insurance charges need to be paid on dividend payment. There are also other ways to enhance the tax benefits of a limited company. A business mobile for example, is seen as a tax free benefit according to the HMRC, while using your personal car for business use can also allow you to off-set costs. There are other tax benefits too.
  • Business Security – registered with Companies House, a limited company is offered some level of protection. New businesses cannot set up and register as a limited company using your company name once you’ve registered.
  • Control – setting up a new limited company, you will probably be the sole director/shareholder, meaning you maintain full control of the business. Decisions can be made easily without interference of others.
  • Survival – limited company formation creates a separate legal entity from the business owner, meaning your company will survive beyond your own existence – unlike with partnerships or sole traders.
  • Easier Business Dealings – suppliers and other businesses are more willing to deal with a limited company than other form of business. Limited companies have a more professional image simply by being registered with Companies House.

The Cons of Company Formation

There are some downsides to starting a limited company:

  • Legal Obligations – due to the benefits offered by the limited company form, the law places a number of legal obligations and duties on company directors to ensure they don’t abuse their power or position. Accountancy requirements and company compliance are just two factors.
  • Accounting And Reporting – limited companies are required to submit more detailed reports and annual accounts than other forms of business. Which can be costly and time consuming, but is necessary to protect the business.
  • Publicity – information about company directors and the business of the company is publicly available after registration. This can be off-putting, but there are ways to protect your home address with a registered office service if you are starting out from home.

Generally the cons of forming a limited company are outweighed substantially by the pros – which is why the number of registered companies in the UK is steadily on the rise and is currently over 200,000. If you’re thinking about starting a business of your own, you’ll need to weigh up the pros and cons of each business structure, but you’ll probably find that company formation is the best option for you.

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