A limited company is the structure that bridges between a full public company, such as a Plc, and a partnership or sole trader or proprietor. It gives the business a little more weight for investors so there is more confidence on that end of things, while there are still certain risks that the directors or owners must be willing to take on to continue growing. Is this the right structure for your business to take on? Here are the key pros and cons of a ltd company to consider before filing the paperwork to make it happen.
The Pros of a Ltd Company
1. There is a better chance to receive investment capital.
This is because the incoming revenues from a limited company are generally more predictable than companies structured around an individual or a partnership. Investors also like the fact that the liabilities of a limited company are limited to shareholding, so there is a little more financial security for those who are looking to diversify their portfolios.
2. The transfer of shares is much easier.
When you’re working as an individual or through a partnership, the valuation of shares can be a very complicated calculation. Not only is the company value considered, but there is also the sweat equity and other talents and skills that someone brings to the table. Under a limited structure, the value per share is much easier to determine because it is based on the finances of the company, making it a straight-forward transfer.
3. Dividends are taxed at a lower rate.
Self-employment taxes are always an unpleasant surprise. When working in a business structured around an individual or a partnership, those taxes can take a hefty chunk out of your personal take-home income. When you’re holding shares from a limited company that earn dividends, those dividends are not subjected to national insurance and are therefore taxed at a lower rate.
4. Corporate profits can also be taxed at a lower rate.
This is an important point to consider if your plan is to retain some of the profits that your business is earning. By making the investment to create the structure of a limited company, you’ll be able to reduce your tax rate when you do retain the profits, allowing you to keep more of the income that you’ve earned.
5. It gives your business some security now and into the future.
When you need a loan to continue your operations, a financial institution has the opportunity to create more security for themselves by being a first-claim creditor on your assets. This isn’t necessarily the case under other business structures. This allows your limited company to potentially have access to more lines of credit or larger credit lines, giving you the chance to take advantage of an opportunity that may come your way.
6. A limited company gives your brand some extra status.
People take you more seriously when you file to become a limited company. When you’re working on your own as a sole trader or proprietor, then you’re seen as a self-employed person who may not be able to hold down a “traditional” job. A partnership is seen in a slightly better way, but doing business with them is seen as a risk. The status of becoming a limited company eliminates those two issues.
The Cons of a Ltd Company
1. There is still some personal liability under a limited company.
Because of this structure, most financial institutions are going to want some level of a personal guarantee before they issue credit. They may also wish to have some personal collateral put down if there aren’t many business assets available. This means the directors of the company are still going to be personally liable for at least some of the company’s debt should something unexpected happen. There still is separation between you and the company, but not as much as other business structures allow.
2. There are more regulations which must be followed.
The directors of a limited company are required to deliver specific documents throughout the year that report on the condition of the business. Failing to do this on time can subject the company to still financial penalties. If it is decided that the directors failed to deliver the documents on purpose for any reason, then criminal charges could even be levied at those responsible. This transition can be very difficult to make, especially in the early days of the limited company being in existence.
3. Accounting fees are typically higher.
Because of the extensive reporting requirements of a limited company, a greater emphasis on the accuracy of the company’s books must take place. In order to accomplish the documentation demands, many limited companies contract accountants out of house to make sure they can meet their reporting requirements. This increases the outgoing expenses. Even if the accounting is kept in-house, more time must be spent to make sure everything is in order.
4. There is less privacy for the business.
Becoming a limited company means having many of the decisions that you’d make behind closed doors be available for public review. Your accounts, strategies, and decisions are all held on the public record so that they can be accessed by anyone who wishes to review them. This even includes your competition in your specific industry. Some of this information can be restricted, but not all of it can be, so expect less privacy under this type of structure.
5. Personal finances can become a bigger headache.
When you want to make a withdrawal from your business after it becomes a limited company, the process can be somewhat difficult to complete. This is because of the tax complications that come from this decision. You must keep your personal finances completely separate from your business finances and this can potentially be a problem if you’ve personally invested much of what you have into the business to make it what it is today.
6. You must prove that you are actually self-employed.
Because of the benefits of forming a limited company, some have taken it upon themselves to form such a structure as a way to disguise the fact that they’re just an employee. You must have working practices in place that can help you prove that you are genuinely self-employed before this structure will be authorized. Add this to the administrative obligations you’ll have and it can take some time to fully form your limited company.
The pros and cons of a ltd company show that this is generally a positive step to take in the evolution of a business. It may require some proactive planning to make sure the disadvantages are appropriately controlled, but otherwise taking on this process is something that every business owner should consider at some point.