BENEFITS OF A LIMITED COMPANY
First and foremost, the principal benefit of trading via a limited company has always been the limited liability bestowed upon the company's shareholders. As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business, but this is not the case for a limited company. As long as the business is operated legally and correctly in accordance with the terms of the Companies Act, the personal assets of the company’s shareholders are not at risk in the event of a winding up or receivership.
Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Quite often, larger organisations in particular will prefer not to deal with non-limited businesses.
Many of the costs associated with managing and operating a limited company are no longer any greater than with a non-limited business. Accountants and other professional advisers often have conflicting views on when they consider the benefits of being limited to outweigh the advantages of being self-employed. In general terms, at least from the perspective of taxation and accountancy, changes to legislation over the last few years have meant much lower costs associated with limited companies, and the majority of profitable businesses will almost certainly benefit from being limited in respect of the taxable income of its shareholders.
Another significant advantage of a company is that if the business is to be sold at some stage in the future, the process of selling the shares in the company to transfer to a prospective purchaser is far easier to achieve than transferring a sole trader-ship or partnership. The capital structure of a limited also allows a business owner to introduce capital to a company at any time and with changes to the Companies Act, the reduction of committed capital in the future is also now very easy to complete if necessary.
The Companies Act 2006, which has now been in force in its entirety since 1 October 2009, makes various changes to earlier Company Law thus making the operation of a private company much easier in practical terms.
There is no obligation for a limited company to commence trading within any set time period after its incorporation. This means that the formation of a limited company is a simple and low cost method to protect a business name. Whilst this does not in itself give any rights to the use of the business name, many clients form companies in anticipation of future development of a new business or in order to protect the limited company name of an existing non-limited business for the future.
See our notes on “types of company” for a comparative guide to the various types of corporate entities that can be incorporated.