Advantages Of Forming A UK Limited Company
By Curtis
Stilson,
Novik Ltd.,
London, United Kingdom
curtis .
stilson [at] thephantomwriters . com
http://www.accounting-on-line.com/
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When starting a business there will often be a point when
you think of forming your business into a limited company – perhaps before
you collect a penny. So why should UK businesses look at limited company
formation?
Limited Liability
If the business fails then the debts don't follow the business founders.
This can be limited in big loans by the practice of most banks insisting
on small companies backing up loans with the assets of their directors
– often asking for director's homes to act as collateral for business
loans. However this will not apply to all debts. This can be especially
useful for a start up business in a higher risk sector.
Legal Damages for Employee Actions
If you find that one of your colleagues has put you in a position where
you are liable for legal damages the difference between a limited company
and being a sole trader becomes key. If you were self employed and taking
on staff, then you would be liable for your employees' actions – even if
you specifically forbid them. If you operate as a company then the company
will be the employer and you will be liable to the extent that you are
directly responsible.
Raising Capital
A UK limited company can give you another vehicle for raising capital.
You can sell shares in your company without losing control. The investors
will be willing to share the risks with you in return for a bigger share
of the reward. Loan finance has its place but equity finance can be a
better option for a new start up business, especially in a high risk industry.
Tax Rates
In most, although not all, cases a company will benefit from a lower rate
of Corporation Tax compared to the rate of Income Tax in the UK. For example
if you were earning £15,000 you would find that you would be paying just
short of £2000, while in a company - if you were also paying yourself
a £5000 salary you could get away with paying almost no income tax. You
also have some ability to take out your profits as dividends (as does
your spouse) which are effectively tax free for people who are not paying
tax at the higher rate.
There are disadvantages – for example losses can be harder to offset against
your other income and sometimes the corporate tax rate may be poor compared
to the personal tax rate. You also may find that corporate tax rates may
be targeted by a future Chancellor of the Exchequer as the tax advantages
are becoming quite widely known. If tax is an element in your decision
to set up a company then we would recommend that you see an accountant
first.
Accountability
Although company directors often – with some justification – complain
about the red tape from regulations that result from limited company formation
in the UK there is some real value that comes out of the discipline of
reporting that the regulations force on you. It means that you meet with
your investors at regular intervals, that a decent set of accounts monitors
your progress and that in some cases you will bring in an auditor to check
that your understanding of the business is correct. What we usually find
is that these disciplines find problems at an earlier and more manageable
stage than otherwise, even if they appear to be a real pain at the time.
Business Continuity
In small family businesses it is often very hard to decide when to hand
over the reins to the next generation. Although you can give your children
a large amount of responsibility in the business, the ultimate control
can be very much an all or nothing affair. The ability to split capital
that is available to a company can become very useful here. Control can
be gradually given to your children through a gradual release of shares.
The ability to gradually release shares also means that inheritance taxes
can be planned for more effectively, and you also have a new way in which
to collect income from your business while allowing day to day running
– and control to pass to others.
Selling the Business
Because a company can legally last for ever then it is much easier to
sell a business – or part of a business – in a limited company to a new
owner. As all your creditors and debtors will have signed their contracts
with your company then they will see no change, or awkward contractual
clauses. Similarly your employees will still be working for the same employee
that they were the day before – it's just the owner of that employer who
has changed. If it is simpler and more transparent to buy a business –
then that business will attract a higher price.
Legitimacy
A limited liability company is often seen as a more stable entity than
a sole trader. This is often only a matter of image, but it is a potent
fact in business life today. Whether it is trade creditors, banks, the
taxman or most importantly customers – the three letters "ltd." can have
a magic effect out of all proportion to its actual significance. They
probably have that same magic effect on you.
Employee Motivation and Retention
A sole trader often faces the cruel problem of how to motivate his or
her key employees. They work hard for you, and you will be in real trouble
if you lose them, but sometimes extra wages or even bonuses don't seem
to motivate them in the same way that extra profits motivate you. Running
a company can deal with this situation by allowing you to give small –
or large – chunks of your business to your employees. You may offer to
sell some of the stock, or offer options or even give it as a bonus. You
don't just motivate and retain your key staff – you also get them to see
the company as their company, and to see it through your eyes.
Next Steps
There is a hard way and an easy way to starting your own company. The
hard way is to get all the relevant documents and forms, fill them in
(without any mistakes) and send them off with the correct fees to Companies
House. The more pleasant – and less time consuming – method of limited
company formation in the UK is to retain us, give us the important details
and let us draw up the documentation. We look forward to doing business
with you.
About The Author:
Article Source: thePhantomWriters Article Submission Service
Published - June 2008
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