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Starting a business in the UK involves a crucial decision when choosing the right legal structure. One of the most popular options available is creating a limited company. A limited company is a separate legal entity from its owners, offering distinct advantages and disadvantages. This article will explore the pros and cons of establishing your business as a limited company, helping you decide on the best structure for your entrepreneurial venture.
Advantages
1. Limited Liability
Limited liability protection is one of the most significant advantages of forming a limited company.
The company is considered a separate entity from its owners (shareholders and company directors). Accordingly, business debts and liabilities will not affect the owner’s personal assets. Suppose the company faces financial difficulties or legal claims. Limited liability limits the shareholders’ risk to their investment in the company (i.e. the amount paid for their shares).
2. Professional Image and Credibility
Operating as a limited company can enhance your business’ reputation and credibility in the eyes of customers, suppliers and partners.
The suffix “Ltd” or “Limited” at the end of your company name adds a sense of professionalism and trustworthiness, which may attract more clients and opportunities.
Furthermore, when dealing with larger corporations or governmental entities, having a limited company status may be a requirement to engage in certain business transactions.
3. Access to Funding
Limited companies can raise capital more easily by issuing shares to investors. This opens up opportunities for equity financing, allowing the business to secure funds for growth and expansion.
Moreover, having a formal legal structure may make it easier to attract investors and lenders. Investors are often more willing to invest in limited companies due to the protection provided by limited liability and the potential for a higher return on their investment through dividends or share value appreciation.
4. Separation of Personal and Business Assets
A limited company requires distinct financial accounts, separating personal and business finances. This separation simplifies accounting and financial management, making tracking business expenses and profits easier.
Disadvantages
1. Higher Administrative Burden
Running a limited company involves more administrative responsibilities than business structures like sole traderships or partnerships.
There are additional filing requirements with Companies House, including:
- annual accounts;
- annual confirmation statements; and
- director information updates.
Ensuring compliance with these obligations may require hiring professional accountants or company secretaries, adding to the business’ operating costs.
2. Less Privacy
As a limited company, your company’s details, including director information and registered office address, are available on public records. For example, the Companies House website has an online database for searches against UK-limited companies. This can reduce the level of privacy for you and your business.
In contrast, sole traders and general partnerships typically enjoy greater anonymity as their business details are not publicly disclosed.
3. Director Responsibilities
Directors of limited companies have specific responsibilities and duties. They must act in the company’s best interests, comply with various legal requirements, and avoid conflicts of interest.
The directors’ fiduciary duties require a deep understanding of the company’s operations and legal obligations, demanding time and effort from business owners. Failure to fulfil these responsibilities could lead to personal liability for directors.
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Key Takeaways
Choosing the right legal structure for your business is crucial and will impact various aspects of your venture’s operations. Creating a limited company has notable benefits, including limited liability protection and a professional image. However, it also brings additional administrative burdens, disclosure requirements, and higher costs.
Before deciding, carefully consider your business’ specific needs and goals. A limited company may be ideal if you prioritise limited liability and seek investment opportunities. On the other hand, if simplicity and lower administrative responsibilities are more important, other structures like sole traderships or partnerships might be more suitable.
Always seek expert legal advice to fully understand the implications and make an informed choice on the best business structure for your business. Each organisation is unique, and by carefully considering the pros and cons of creating a limited company, you can ensure that you set up a business structure that best supports your long-term vision and goals.
If you need legal assistance setting up a limited company, our experienced business structure lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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