Forming a Limited Company

Advantages of Forming a Limited Company
If you are entering into a business enterprise either on your own or with a partner it is seriously worth considering forming a Limited Company.

The advantage of forming a Limited Company is that it is a separate entity to the Directors who are, in effect, employees of the Company. The Directors cannot be called on to meet any liabilities out of their personal assets and their potential liability is therefore limited to the money they have invested in the Company to buy shares, this can be as little as two pounds, though the average is about one thousand pounds. This means that the Company will have issued one thousand shares at a value of one pound each.

If a Limited Company is not formed, a partner in a partnership, or a sole trader, could be liable for any debts out of his personal assets, this could even mean him being forced to sell his house to pay debts. An even worse scenario is where there are two partners in a firm and one of the partners has no money, in this case the other partner could be made to pay his partners share of the debts as well. This is known as joint and several liability. Solicitors and Accountants are not allowed to form Limited Companies for their own businesses, as they are not allowed to limit their liability. In all other businesses it is allowed by Law otherwise no one would enter into any risky ventures and this would be bad for the economy.

It is therefore essential when entering into a business of a speculative nature to consider forming a Limited Company, particularly if you have personal assets that you do not wish to risk.

Other Advantages to Forming a Limited Company

  • It adds a certain amount of prestige to your venture and you are able to assume the title of Director or Managing Director.
  • There are considerable Tax advantages if you operate as a Limited Company. In fact there has never been a better time to start a Limited Company. This is because the compulsory audit has been abolished for small companies and Corporation Tax has been lowered. The small companies' rate is 19% for companies with taxable profits between £50,000 and £300,000 and the starting rate is 0% for companies with taxable profits of £10,000 or below. Advance Corporation Tax has also been abolished.

Disadvantages of Forming a Limited Company

  • You will have to follow certain procedures and make an annual return to the Registrar of Companies. However this is a relatively straightforward procedure and should not present you with any problems. It is usual to employ an Accountant but this can be very expensive and the purpose of this site is to encourage people to save on professional fees by doing simple things themselves. It is however vital that the annual return is submitted otherwise a fine of up to £2000 could be charged and your company name struck from the Register of Companies. This however will only occur in the case of very serious delays.
  • As a Limited Company you will find it difficult to borrow money or get credit because of your Limited liability status. It is usual for creditors to get you to sign a personal guarantee, which will have the effect of nullifying your Limited liability status. For substantial loans you may be required to give collateral to cover the loan.
  • You will be required to display your company name outside the registered office of your company and outside any premises where the company’s business is carried out.

Generally speaking the advantages of forming a Limited Company far outweigh the disadvantages.

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