This type of business is different from sole-trader and partnership as personal liability is limited. Tax planning opportunities are also potentially greater.
Often there is perceived prestige in operating as a limited company by the public, whether or not this is justified! Some larger businesses prefer to do business with limited companies rather than sole-traders for various reasons.
As a limited company, some information must be filed at Companies House access to which is available to the public and so you will potentially lose some of your privacy – directors’ and shareholders’ personal details and abbreviated accounts must be filed.
A limited company is a separate legal entity in law, that can enter into contracts in its own name. The fact that the company has its own legal identity, separate from its owners, is very important as it means that the company, and not the directors/shareholders, has liability for its debts!
There are only a few exceptions to this rule about personal liability :
- if you, as director/shareholder of the company, offer a bank or other creditor a personal guarantee to repay the company’s debt. In that instance you then become personally liable to repay the debt if the company is not able to.
- If you trade with others while the company is insolvent or unable to pay its debts
- You commit fraud or are wilfully negligent in the way you conduct the company’s business.
Pros and Cons of a Limited Company
- Limited liability – as explained above, this is especially useful if there are significant risks associated with your business activity.
- For some people, there can be a perception that a limited company business is bigger than might be the case if it was a sole-trader and so, more secure to deal with.
- Tax efficiency – trading as a limited company can be more tax efficient as dividends, the main way you extract earnings from a company, do not attract National Insurance. Unlike a sole-trader and partnership, you can also decide how much you take from the business each year potentially saving tax by reducing the earnings subject to higher rates of tax.
- Cost – the costs associated with setting up a company and for preparing company accounts and tax returns can be a bit higher than those of self-employment.
- Companies must file accounts and various other documents on public record with Companies House, so companies have less privacy than unincorporated businesses.
- Some expenditure is more difficult to claim through a limited company, this is particularly the case if there is mix of business and personal in the expense
- Unlike sole-trader/partnership businesses, any losses generated, belong to the company and cannot be used to reduce personal tax liabilities of the directors or shareholders.
The right choice of business entity is very important as it can have a significant affect both for commercial matters and taxation. At Taxsmart we can advise on all aspects of this and help you to make the right choices for your circumstances.
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