A limited company is a business structure with its distinct legal entity, separate from its owners (shareholders) and directors. The entity of the business is separate from the owner even if the business is being run by a person acting as shareholder and director.
A limited company is one of the most popular business structures for organisations, due to the many benefits it has over other types of legal business structures such as sole trading. We discuss some of these benefits below:
1. Minimised/Limited Liability: The biggest benefit of forming a limited company is limited liability. Incorporation of a limited company naturally creates a legal distinction between the business owner and the business. This means that should your company go bankrupt, your personal money and assets are protected because the business is completely separate from the owner. This distinction is known as ‘Legal Personality.’ Any debt incurred by the company is the responsibility of the company and not the owner.
Meanwhile, Sole traders run a much higher risk as the owner of the business is completely liable for all debts, losses, and expenses associated with the business. There is no distinction whatsoever between a sole trader and his business. His personal assets could be seized to pay creditors if needed.
2. Credibility and Prestige: Most big companies prefer to deal with incorporated entities because of the high risk involved in awarding contracts. Having a limited company naturally gives you a competitive advantage over sole traders. Another benefit is your company has a unique name registered under the law. This means no business or company can use the same name in the same country as your company. Sole traders, on the other hand, do not enjoy this protection unless they get a trademark.
3. Loan Opportunities: Limited companies are more likely to get loans than sole traders because most banks prefer to give loans to incorporated businesses. This is because limited companies may have an established presence or track record of profitability, and that assures banks that you can repay the loan and interests. Furthermore, it is possible to secure a loan for a company without the shareholders or directors using their assets as collateral.
4. Distinct Legal entity: Compared to sole traders, a limited company has its own identity. Its legal personality is separate from the shareholders and directors. As such, the death of the shareholders and directors is not necessarily the end of the company. A company will only come to an end when legally dissolved or liquidated. This also creates better security for employees of the company, unlike sole trading where the death of the owner will most likely lead to the end of the business.
5. Dormant company set-up: After you register your company name and go through the necessary formalities to keep your company active, a limited company does not need to function to exist. This means, unlike a sole proprietorship, you can have zero financial transactions all year and still have a recognised company.
6. Tax Savings: After registering your LTD company you have more options, you can pay yourself via dividends. If taking more profit would result in paying a higher rate personal tax you can decide to leave more profit in your company to remove at a later date or invest it.
Both sole traders and limited companies have important benefits, depending on the owners. It is left for you to decide which one of them best suits your lifestyle, goals, and ideology. Get in touch today to enquire about our Bristol accounting services.