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The advantages and disadvantages of setting up as a limited company

Quote�Limited companies are rather more complex than partnerships and sole trader status.�End Quote

In the UK today, around a million businesses are limited companies. Here we'll examine the advantages and disadvantages of setting up a limited company. You can read about the pros and cons of partnerships and sole traders in another article, here.

Limited companies are rather more complex than partnerships and sole trader status, but shouldn't present too many obstacles to a start-up and can certainly offer distinct advantages.

To begin with, they have to be registered with Companies House, the UK's central body for company registration. This means checking on name availability, compiling relevant information such as directors' details and the company office address, and drawing up Articles of Association and a Memorandum. You must complete an annual return, hold an annual meeting, and if your turnover is above �60,000, register for VAT.


So, bearing in mind all this admin, what are the benefits? The 'limited' in limited company means that your personal liability is no higher than the amount unpaid on the company's share capital. This means if you get into trouble, you will not be in danger of losing your personal assets to meet a debt. So your company is able to take certain risks which will allow it to invest and expand.

In addition, people often take a limited company rather more seriously than a one-man-band or partnership, which means you should be able to work with other companies more easily and often obtain better credit terms from suppliers. Combining the talent and experience of your colleagues within a board of directors means that everyone can be rewarded fairly for the effort they put into the company and each will have a clear idea of their responsibilities.

Quote�The structural difference means that the company can have value in itself.�End Quote

Finally, the structural difference - the fact that a limited company is an entity in its own right - means that the company can have value in itself. If you personally stopped working, there's very little additional value in a partnership.

But a limited company is valued as a standalone unit - with staff, intellectual property and a skillset all of its own. So if you are looking for value that lasts longer than the individuals involved, then a limited company is definitely the way to go. Similarly, outside investors will be putting their money into the company rather than staking their investment on you as an individual.

To summarise, with a limited company:

You have an administrative burden of accounting and financial disclosure

You have a stronger platform on which to grow. You can also sell shares in the company, which means outsiders can become financially involved without undue complication

You have fairly good tax avoidance measures; particularly the ability to pay yourself a mixture of salary and dividends. The Government has acted to reduce this gap, but there are still tax benefits in being limited.

Obligations in a limited company

The structure of a limited company comes with specific obligations. These are usually organised by the Company Secretary. Your Secretary may not be involved in the day-to-day running of the company, but he or she does have specific responsibilities. You cannot be both a sole Director and Company Secretary; so if you're a one-man-band, you'll need to find a friendly face to take on these duties. Secretarial obligations include:

Annual accounts: for smaller companies, full accounts aren't required; a shorter-form report is now acceptable

Annual Return: a document detailing key company facts and personnel, which must be sent to Companies House

This can all sound rather overwhelming, so your first port of call should be a qualified accountant - expect your initial consultation to be free of charge.

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What next?

Does it sound like limited company status is overkill for your business? In that case, read more about being a sole trader or forming a partnership.

Companies House is the place to go for all the essential information about forming a limited company.

The Institute of Chartered Secretaries and Administrators provides guidance and runs courses, and also produces a booklet on the responsibilites of the Company Secretary.

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