What are the advantages and disadvantages to forming a private limited company?
Many new entrepreneurs start their business as sole traders (or as a partnership), however many businesses reach a stage where on balance it is more beneficial and their business has reached a size and stage (both physical and financial) where it is more practical to operate through the mechanism of a limited company.
In deciding whether to form a private limited company, there are a number of advantages and disadvantages that need to be considered. These include:
• Limited liability is the obvious advantage to a limited company and the reason why so many businesses ultimately decide to trade as such. It is hugely advantageous to any business 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.
• 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 but limited companies are only taxed on their profits and are not subject to personal tax rates placed on sole traders or partnerships (which will most likely be considerably higher).
• 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.
• Registration and accounting requirements mean that details of your company will be accessible to the public. There will also be heavier administrative requirements in operating a company.
• Companies can be used to own a business with a degree of continuity that allows a number of different persons to participate as directors or shareholders. As a company exists as a separate legal entity, it is not terminated or dissolved when shareholders die or sell their shares. This ensures security for employees and other members.
• 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.
• The built-in share structure of a company makes it attractive to investors.
• The share structure of a company also allows companies to attract key and talented employees by offering them an ownership interest in the form of shares or share options.