Advantages and Disadvantages of Forming a Limited Company
Your first decision is whether to form a company or to trade as an individual or a partnership. The critical factors are usually:-
1. Corporation tax payable on company profits may or may not be more favourable than the income tax payable by you on earnings as an individual. This will depend on circumstances.
2. It is advantageous to trade without unlimited personal liability to creditors. Liability is limited to your capital contribution in a company. However, wrongful trading or fraudulent trading can render directors personally liable for their company's debts and directors may in practice have to give personal guarantees.
3. Company status may be an advantage in giving your business a level of credibility that trading under your own name(s) or other trading style may not provide.
4. Registration requirements mean that details of your company will be accessible to the public. The heavier administrative burden of operating a company is a disadvantage.
5. Companies can be used to own a business with a degree of continuity and allow a number of different persons to participate as directors or shareholders. A company continues to exist as a separate entity, and is not terminated or dissolved even when shareholders die or sell their shares which is an advantage over a traditional partnership.
6. Companies provide a convenient method to give an objective value to a business and to create an entity that can be sold as an asset.
7. The built-in share structure of a company makes it attractive to investors.
8. Capital incentive - the share structure also allows companies to attract key and talented employees by offering them an ownership interest in the form of shares or share options.