Limited Companies – the pros and cons of ownership

This month, The Avanti group (UK) Ltd are exploring the sometimes onerous company secretarial duties of a Limited Company.  In addition, here they balance some of the advantages and disadvantages of running a limited company.

 A limited company is a separate legal entity from its owners. It can trade, own assets and incur liabilities in its own right.  The business affairs are separate from the personal affairs of the owners, but there are legal regulations to comply with. The appropriate structure will depend on a number of factors, including consideration of taxation implications, the legal entity, ownership and liability.

Your ownership of the company is recognised by owning shares in that company. If you also work for the company, you are both the owner and an employee of that company. When a company generates profits, they are the company’s property. Should you wish to extract money from the company, you must either pay yourself a dividend, as an owner, or a salary, as an employee. The advantage to you is that you can have a balance of these two to minimise your overall tax and national insurance liability.

Companies themselves pay corporation tax on their profits after paying your salary but before your dividend distribution. Effective tax planning requires profits, salary and dividends to be considered together.

 Advantages:

 Limited liability

A company normally provides limited liability. If a shareholder’s shares are fully paid he cannot normally be required to invest any more in the company. However, banks often require personal guarantees from the directors for borrowings. The advantage of limited liability will generally apply in respect of liabilities to other creditors.

 Credibility

The existence of corporate status is sometimes deemed to add to the credibility or commercial respectability of the business.

 Transfer of ownership

Effective ownership of the business may be more readily transferred, in comparison to a business which is not trading as a limited company.

 Legal continuity

A company will enjoy legal continuity as it is a legal entity in its own right, separate from its owners (the shareholders). It can own property, sue and be sued.

 Borrowing

Normally a bank is able to take extra security by means of a ‘floating charge’ over the assets of the company and this will increase the extent to which monies may be borrowed against the assets of the business.

 Pension schemes

The company could establish an approved pension scheme which may provide greater benefits than self-employed schemes.

 Taxation

A Limited Company pays Corporation Tax (CT) on its profits chargeable to tax at a rate of 20%. Any capital gains are also paid at the prevailing rate.

Disadvantages:

 Director’s responsibilities

 A company director may be at risk of criminal or civil penalty proceedings e.g. for late filing of accounts or for breaking the insolvency rules.

 New companies can be purchased relatively cheaply in a ready-made form – usually referred to as ‘off the shelf’ companies, which we have confirmed we can do for you – but you are more than happy to purchase this yourself and then pass the paperwork to us once we are the registered office to handle the annual forms required.

 There are additional administrative factors in running a company, such as statutory accounts preparation, company secretarial obligations and PAYE (Pay as You Earn) procedures. A big advantage of owning a limited company is that your personal liability is limited to the nominal share capital you have invested.

 Administration

The annual compliance requirements for a company in terms of administration and accounting tend to result in costs being higher with a company than for a sole trader or partnership. Annual accounts need to be prepared in a format dictated by the Companies Act and, in certain circumstances, the accounts need to be audited by a registered auditor.

Details of the directors and shareholders are filed on the public register held by the Registrar of Companies.

 Privacy

The annual accounts have to be made available on public record – although these can be modified to minimise the information disclosed, and can be an advantage too – as you are seen as more transparent

MD of The Avanti Group UK Ltd, Victoria Sharp adds “We can assist companies  in freeing up their time and resources by taking the burden of company secretarial duties and all associated filing. For a standard company secretarial service at a fixed rate, our dedicated team can maintain the necessary registers and host your registered office, allowing you to do what you do best – running your business”