An organization in which the liability of the members is limited to the amount they have invested is called a limited company. Its finances are owned by itself, not by the members. The company’s profits are also in its name which can then be shared. Limited companies are of two types – public companies and private companies. While anybody can buy shares of a public company, who can be the members of a private company is defined by the law. Given below are some advantages and disadvantages of a limited company.
Advantages of a Limited Company
Only the profits of a limited company are subjected to tax and the tax rate is lower than that of a sole or partnership company. A limited company can be very beneficial to its members where they take only a minimum salary from the company which may be taxed. They can then divide the dividends among themselves, the tax rate on which is very less.
A good amount is granted as travel allowance from a limited company. So, you can avoid using the company car. You can claim the amount you spent on fuel which is not taxed. This money is also tax deductible to the company. This gives you double advantage.
The members of a limited company have only limited liabilities. This means that they are legally responsible to the company’s debts according to their investment only. This provides them a good level of protection if anything goes wrong.
A limited company exists as a separate entity independent of its owners. It exists even after the members change. The operations of the company are not much affected by the retirement or death of its members. This is an added security to the existing members.
It is possible to register a limited company in Companies House with a unique name. This name will then be protected by law. No other company can use the same name. But this is not the case with sole traders. They can use your company name which may incur loss for your business.
Disadvantages of a Limited Company
Distribution of powers
The shares of a public limited company can be bought by anybody, thereby increasing the number of members. This distributes the management powers to more and more people which may lead to disputes between the shareholders and the Directors. It is not easy to run the company if more people interfere in its working. Other companies can also take over if they have more shares.
Limitation in fund raising
There are a lot of restrictions imposed on a private limited company. The decision of admitting new members into the company is defined by law. Public companies can sell their sales to anybody whereas it has certain limitations in private companies. So fund raising is a problem for them.
It is a tough job maintaining the accounts of a limited company. The bookkeeping and accounts are regulated by complex rules. Yearly accounts are to be submitted by the company with a double entry format and balance sheets. It will be a costly and time consuming affair for larger companies.
A lot of paperwork is involved in the formation and working of a limited company. As discussed, there are many strict laws related to the company. Any discrepancy in the proceedings can cost a lot. So, every single detail must be properly documented for future reference.
A lot of money is involved in the initial set up and maintenance of a limited company. The paperwork is a lengthy and costly business. Every year a large amount is spent on the company accounts. Since the accounts are a bit complex, it is very important to hire a professional accountant who can handle it better.