A business can opt to trade as a limited company. Unlike with a sole trader or partnership where the owners of the business are the legal entity, a limited company is a distinct legal entity that is able to enter into contracts in it’s own name. This means that any liabilities that the company has, are the liabilities of the company and not the directors or shareholders.
There some instances where this legal distinction is not enforceable, i.e. where the directors or shareholders have given personal guarantees for a debt or when the directors have not been responsbile in their actions while trading.
Advantages Of A Limited Company
- A considerable advantage is that mentioned above. If the company incurs debts with suppliers or other creditors or becomes financially liable for any other reason, the directors and shareholders of the business are not personally liable and their personal assets are protected.
- There can be considerable tax savings as their are more opportunities for tax planning strategies compared with a sole trader or partnership.
Disadvantages Of A Limited Company
- There is a chance of double taxation. The company will have to pay corporation tax on it’s profits and can only distribute the remaining profits to its directors and shareholders. This can mean that tax is paid by both the company and the directors or shareholders when money is extracted from the company.
- A degree of privacy is lost as annual accounts have to be submitted to Companies House and become available via a public record although this can be partially be overcome by submitting abbreviated accounts.
- If you company exceeds certain limits your company accounts may have to be audited which will greatly increase your accountancy costs, although most small businesses are exempt.
If you would to discuss in greater details the benefits and potential pitfalls of trading as a limited company then please contact us today to arrange a free no obligation consultation.