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Benefits and costs associated with a limited company?

One primary benefit is Limited Liability. If you maintain the company’s legal status, and avoid personally guaranteeing the company's obligations, it is the company that would be solely responsible for its own obligations. The shareholders are protected against company failure in that their liability to creditors is limited to their share capital, therefore safeguarding the owner’s personal assets.

However this can sometimes be illusionary. Your main creditor is likely to be a bank, and they would normally require the directors to be guarantors should the company fail. When dealing with banks and other money lenders, avoiding personal guaranteeing may not be possible.

There is also currently a real tax benefit to be achieved from incorporating, as the tax system for companies is very different to that for individuals. For businesses with profits of £10,000 to £15,000 the tax saving could be in the region of £300 to £500. However tax systems and legislation change and the government is taking measures to put a stop to “income shifting” (allocating income purely on the basis to minimise the tax bill rather than the individual contribution to the business) and dissuade small companies incorporating for tax benefits by increasing the corporation tax rates.

Other potential benefits of incorporating (even for one-person operations):
The Company name is immediately protected, as Companies House will not allow the registration of another identical Company name. (Please note that Domain Name Registration on the Internet is not automatically protected. Please ring if you require details).
Corporate identity: the sense of image, stability, sophistication, credibility, and permanence results from incorporating.

Raising capital: you can issue stock to investors to raise capital which may be more advantageous than borrowing and making interest payments. A corporation can also issue and sell additional stock.

Continuous life: a company can survive its founders, provided it complies with ongoing legal and legislative paperwork and pays the annual filing fees.

The annual compliance requirements for a company in terms of administration and accounting tend to result in costs being higher with a company than for a sole trader or partnership. Annual accounts need to be prepared in a format dictated by the Companies Act and, in certain circumstances, the accounts need to be audited by a registered auditor.

Also an annual return needs to be completed detailing the directors, share capital etc and any changes in the past year.

Disclaimer

The content and advice is for information only. Last updated 26.07.2009.

For up to date information and advice, based on your specific circumstances, please contact us.

We cannot be held responsible for actions taken with reference to the content contained on this website.

 


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