The limited company

A Company has a separate legal identity to that of the people who own the company. When a limited company enters into a contract or borrows money, its liability is limited to the amount invested in the company. The owners of a limited company own shares in it, and are not personally liable for debts incurred by the company.

Private limited companies need only have one shareholder and cannot publicly trade their shares. By contrast, a public limited company (plc) has its shares freely tradable on a recognised stock exchange.

Advantages

  • The liability of the owners of the business is limited to the initial cost of their shares. However, it is not uncommon for business owners to be asked to offer personal guarantees when borrowing money or other cases.
  • It is often relatively easier trying to raise money, and easier to sell part of the business (since you simply need to sell a number of shares).
  • Employees are able to own a share in the business.
  • Suppliers and customers may perceive that limited companies have more credibility making them more keen to do business with you.
  • There can be tax advantages for high earners who may be able to keep money in the business or put the money in a pension scheme.

Disadvantages

  • Set-up. There is a cost in setting up a company, especially if you do this through a solicitor or accountant. However, these days it is possible to set-up a company quite cheaply (in some cases under £50) using web based services.
  • Administration. There is a whole mass of legislation applying to companies, and you will need to be aware of those that apply to you. There is also an annual return that must be filed at Companies House annually.
  • A company must file annual accounts at Companies House in a format that complies with recognised accounting standards. Whilst in the case of small companies you may only need to file a balance sheet, any information you do submit to Companies House is a matter of public record and can be viewed by anyone.
  • In certain cases (see the Companies House web site for more information, especially if your turnover is millions of pounds, you must produce audited accounts and the cost of this can be relatively expensive (compared to producing non-audited accounts).
  • National Insurance (NI). A company is obliged to pay employer’s NI contributions and most employees also have to make contributions, meaning that in total NI is higher than as a sole trader or partnership.

Documents

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