Whether you’re running your company as a sole trader, a partnership, a limited liability partnership or a limited company, recent changes to tax legislation have caused businesses to carefully consider the way in which they operate. If you are considering starting a limited company, then there are a number of elements that must be considered before you finalize the way you’re viewed in the eyes of the law.
Apart from the national insurance and tax queries, there are a number of factors that you must take into account when starting up a limited company. It’s definitely a good idea to consider legal issues as well. Companies like LegalZoom can be of assistance. From your company’s expected rate of growth to the degree of commercial risk, as well as administrative obligations and redundancy packages, the first few years of your new business are extremely important.
At first glance, operating as a sole trader of a partnership may look appealing, as company funds are subject to fewer restrictions. However if you consider the benefits of a limited company, for example the completely separate legal entity status, there are a number of advantages that can be gained from this business structure. Let’s take a look at the pros and cons of starting up a limited company.
Advantages Of A Limited Company
Firstly, a shareholder of a limited company cannot be required to invest any more in the company if they have paid fully for their shares. Furthermore, although the protection of limited companies will generally apply in respect of liabilities to other creditors, bank loans will have to be secured against personal guarantees by the company’s directors.
When it comes to legal continuity, a limited company is an individual and separate legal entity, meaning it can sue, be sued and also own property. Subject to the provisions of the Articles of Association, effective ownership or part ownership of the business may be readily transferred with little fuss. However the capital gains tax position will need careful consideration, even though ownership transfer is usually covered by inheritance tax business property relief.
As company directors are office holders in the eyes of the law, the national minimum wage does not apply to them. Also, a limited company has the ability to offer its employees the chance to buy their own stake in the business.
Disadvantages Of A Limited Company
Forming a limited company incurs administrative costs as well as legal costs too, including new stationary, new VAT registration, new accounting systems and even a new PAYE system. Furthermore, forming a new limited company means that you will have to inform service and providers and suppliers of your change of company status.
Additionally, a limited company may be able to deter capitals gains tax on the transfer of goodwill, but the timing of this procedure and its effect on income tax cessation must be carefully planned. When it comes to privacy, limited company accounts can be viewed by the public, and the company is taxed on profits for each accounting period. Instead, sole traders are taxed on profits for the current tax year .
Lloyd is currently working with Brookson, who are specialist accountants for freelancers and contractors.