Starting a company is only part of business success. Company registration is one of the little steps that, if not done right, can lead to big problems and even business failure. This is why you must understand company registration before taking this giant leap.
There are many types of business entities that you can choose from when starting a business. The most common in the UK are sole traders, partnerships, and limited companies. In this article, we will mainly look at a limited company. It is a company structure where the liability of the shareholders is limited to their investment in the company. Before you decide on this structure, you must understand the pros and cons of a limited company.
Pros of setting up a limited company
This is one of the most significant advantages of a limited company. As a shareholder, your liability will be limited to the amount you have invested in the company. It limits your exposure and protects your personal assets if the business has problems. For example, if the company is sued, the shareholders will not be personally liable for any debts.
It is worth noting that even though the shareholders’ liability is limited, they can still be held liable for any illegal or fraudulent activities carried out by the company. You should consult with a company formation service for more information on liability and how to protect yourself as a shareholder. It would be best to have the right people running your company.
Easier to raise capital
Capital is the backbone of any business. It is what enables a business to grow and expand. A limited company will find it easier to raise capital than other business structures such as sole traders and partnerships. Investors are more willing to invest in a company with limited liability.
There are several ways in which a limited company can raise capital. These include issuing shares, taking out loans, and selling assets. It does not necessarily mean that a limited company will quickly raise capital. The company will still need a solid business plan and track record to attract investors.
Safeguards your brand and name
Your name and brand are the two most important assets of your business. They determine how customers perceive your business. As a limited company, you have the legal right to safeguard your name and brand. You can do this by registering your trademarks and copyrights. This will give you exclusive rights to use your name and brand. It will also make it easier to take legal action against anyone who tries to use them without your permission.
In addition, a limited company can also use a trading name. This is a name different from the company’s registered name. A trading name can help you differentiate your business from your competitors. It can also make it easier for customers to find and remember your business.
Gives you an air of credibility
A limited company is considered more credible than a sole trader or partnership. The business is treated as a separate legal entity from its shareholders. This makes it seem like a more professional and established business. Customers are more likely to do business with a company that they perceive to be credible.
It can be beneficial if you are trying to win large contracts. It can also be helpful when you are trying to attract high-quality employees.
Easier to sell or transfer
You could get to a point where you want to sell your business or transfer ownership to someone else. This is much easier with a limited company than with other business structures. You can attribute this to a limited company being a separate legal entity. You can sell the company’s shares without selling the business’s assets.
You can also transfer ownership of the company by selling your shares. This is a much simpler process than transferring ownership of a sole trader or partnership.
Cons of setting up a limited company
More regulations to follow
The legal landscape for businesses is constantly changing. There are always new regulations that businesses need to follow. As a limited company, you must comply with all the relevant regulations. These include company law, taxation law, employment law, and health and safety law.
This can be a burden for some business owners. It can also be expensive to get expert advice on all the different regulations.
Higher accounting fees
A limited company is required to prepare financial statements and submit them to Companies House. It can be a complex and time-consuming process. As a result, you will need to pay higher accounting fees.
You will also need to pay annual filing fees to Companies House. These fees are based on the size of your company.
Reduced business privacy
As a limited company, your business affairs are open to public scrutiny. This includes your financial information and details of your shareholders. If you are trying to keep your business affairs private, then a limited company is not the best structure for you.
It can also be a demerit if you are trying to attract investment from venture capitalists. They will want to see your financial information before they invest in your company.
Complicates personal finance
Making a withdrawal from your business after switching to a limited company can be complicated. The tax complications associated with this can make it a less attractive proposition for some business owners. Ideally, you need to separate your personal finance from the business, which can be challenging if you have invested a lot.
You must provide proof of self-employment
To set up a limited company, you must first provide proof of self-employment to the government. You will need to register for self-employment tax. You will also need to get a business bank account and register for VAT if your turnover exceeds the threshold.
However, this is easier said than done. The government has made it difficult for people to get proof of self-employment as they look to crack down on tax avoidance. You might need help from an accountant or a solicitor to set up your limited company.
Setting up a limited company has both advantages and disadvantages. It would be best to consider these factors before deciding whether it is the proper structure for your business.
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