You're thinking of starting a new business but aren't sure about which route to go. There are advantages and disadvantages of becoming a private limited company. On one hand, it can be beneficial for the company to have its own brand identity which will enable them to be more successful in its line of work. On the other hand, there is a risk that this may lead to confusion among consumers who cannot distinguish between the company and its directors - especially if they have common names or surnames. Let's take a look at a few of the advantages and disadvantages in more detail.
1) What is a Limited Company?
A limited company is a business that places a limit on the personal liability of its owners, who are known as 'members' or 'shareholders'. If a limited company goes into liquidation, then its members will lose their investment but they will not be held personally liable for any debts. In contrast, if someone owns an unincorporated business (i.e. one which is not a limited company), they will be personally liable for any debts the business may incur. Like anything, there are a few necessary requirements needed in order to start a limited company. For one, there must be at least one shareholder and one director. The company must also have a registered office, which can be either the home address of the director or other premises. There are a few of the advantages of private limited company, but to truly use them to their full potential, you need to pay close attention to details. Let’s look at them in more detail below.
2) Advantages
There are many advantages of starting a Private Limited Company.
No Minimum Capital Requirement
When starting your business as a private company, it's possible to start off small and grow bigger over time without any limit on capital growth! Furthermore, if you do need to raise money for the company in the future, there is no minimum or maximum amount of money that you can raise.
Ownership Transfers Easily
Unlike when starting an unincorporated business, when you start your own limited company it's possible to transfer ownership shares amongst members (a family member or partner for example) without involving the company.
Limited Liability for Directors
As previously mentioned, one of the advantages of starting your own limited company is that it provides its members with limited liability. This means that if the business goes into liquidation, members will be liable to lose their investment but not their personal assets (e.g. property or savings), provided they are not involved in running the business. Other advantages of having a limited company include: no annual returns or accounts filing requirements; you can claim tax relief on certain types of expenditure incurred by the business and you are exempt from VAT until you reach a specific threshold.
Tax Benefits
One of the advantages that comes with starting your own private limited company is that you can avoid paying punitive taxes on your profits and any personal asset dispositions or transfers made by directors.
3) Disadvantages
Personal Liability for Directors
One of the disadvantages of having a limited company is that directors are liable for any personal liability incurred by the business. This means that if one of your employees was injured at work, you would be held personally responsible and required to compensate them.
Confusion with Consumers
Another potential disadvantage is that consumers may become confused between you, as an individual private citizen, and the business which adopts your name. There have been cases where companies have had to change their branding simply due to people not being able to tell the difference between themselves and the director! It is therefore important that this isn't something that could cause damage or harm in your line of work.
Taxation Levels
Another disadvantage of having a limited company is that the level of taxation for this type of business entity is higher than that of an unincorporated business. Other tax disadvantages include additional costs when issuing shares or dividends to members and restrictions on being able to claim reliefs on certain types of expenditure.
Unfamiliarity with Legal Requirements
Running any kind of business can be difficult enough, but if you are new to the process then it may feel overwhelming trying to deal with legal requirements alongside everything else. This includes filing annual returns at Companies House, producing accounts, complying with legislation affecting your industry, paying corporation taxes etc...
4) Is A Private Limited Company Right For You?
So, is a private limited company the right option for you and your business? It's important to take into account both the advantages and disadvantages of this type of company structure when making your decision. If you're looking for limited liability, tax benefits and a degree of anonymity then a private limited company is likely to be the best option. However, if you're not comfortable with the idea of taking on some personal financial responsibility or are worried about the potential for confusion amongst consumers, then you may want to consider an alternative.
If you're still unsure after weighing up all the pros and cons, it's always best to speak to an accountant or lawyer who can give you specific advice relevant to making an informed decision. Let's recap. If you are looking to start your own business, there are advantages and disadvantages of becoming a private limited company. One advantage is that it has no minimum capital requirement which means the amount of money needed to be raised for your company can vary depending on what stage in growth you're currently at. Another advantage is that when transferring ownership shares between members (a family member or partner), it's possible without involving the company.
There are also advantages such as being able to claim tax reliefs on certain types of expenditure incurred by the business and have limited liability for directors who run this type of private company. However, one disadvantage includes personal liability for directors and another disadvantage might include confusion with consumers due to people not being able to tell them apart from an individual person and the company. It is important to consider all these advantages and disadvantages when deciding if a private limited company is right for you and your business.
Next, read Costs You Need To Consider When Working From Home.
This post should not be taken as legal guidance.
