An organization in which the liability of the members is limited to the sum 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. These companies could be limited by guarantee or shares. Companies limited by share 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.
Limited companies are common in many countries. Though it is termed as limited company everywhere, their rules vary from country to country. Each company has a unique name of its own. If the suffix Ltd or Limited is given to the company name, then it is a private limited company. In normal cases, the directors of the company are just employees who look into the administration works. They need not be shareholders. Basically, the profits are all in the company name. The directors have a say in the company’s money only when it comes to their salary. Given below are some advantages and disadvantages of a limited company.
The Advantages Are,
This is one of the main advantages of a limited company because paying more tax is a big concern for businesses. Even as an individual, you try to reduce the tax amount by lowering the taxable income. In case of a limited company, only the profits are subjected to tax and the tax rate is lower than that of a sole or partnership company.
The profits are subject to Corporation tax whose current rate is 20%. A limited company can be very useful to its members where they take only a minimum salary from the company which may be taxed. They can then divide the profit among themselves, the tax rate on which is again very less.
A limited company grants you a good amount as travel allowance. So, you can avoid using the company car. You can claim the amount you spent on fuel. And the good news is that this amount is not taxed. This money is also tax deductible to the company.
This gives you double advantage. In addition to the travel expenses, you can also claim for the money spent on things required for running the company. This includes all postage and printing costs and also the money spent on buying equipments. But, be careful not to claim for the expenditure done for your personal purposes. You may not want to get into unnecessary trouble.
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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 something goes wrong with the company. The plus point is that the shareholders get the opportunity to grow with the company.
Even if the company falls, these investors or the owners are not sued. When the company goes into loss, the assets of the investors remain untouched. They lose only the money which is directly invested in the company, nothing more. This money is usually considered as the company’s assets and therefore can be seized. This is a major problem in sole trader where the owner has to bear all the losses.
A limited company exists as a separate entity independent of its owners. This factor separates it from a corporation or a limited liability entity. Limited company exists even after the members change. The operations of the company are not much affected by the death or retirement of its members.
This provides an added security to the existing members. Suppose if all the power is in the owners’ hands, then the members or the employees could lose their job when the owners change. Nobody would opt to work in such a company where there is no security for the job.
It is possible to register a limited company in Companies House with a unique name. This is an important procedure when you register a company. This name will then be protected by law. Henceforth, the same name cannot be used by another company. This way, your business will have a unique identity and is separated from other companies. But this is not the case with sole traders. They can use your company name which may incur loss for your business.
You can take the help of online tools to see if the name you have chosen is unique or not. If you register the company on a date, then the name will be safe from that date onwards. It is not necessary that you start your business from that day.
Disadvantages of a Limited Company
Distribution of powers
The shares of a public limited company can be bought by anyone, thereby increasing the number of members. This distributes the powers to more and more people which may lead to arguments between the directors and the shareholders. It is not easy to run the company if more people have a say in its working.
Other companies can also take over if they have more shares. Thus, the dilution of power is a major disadvantage which greatly affects the smooth working of the company. More people with decision making power is not desirable as this may delay the major decisions and affect their quality. As the saying goes, too many cooks spoil the broth.
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Limitation in fund raising
There are a lot of restrictions imposed on a private limited company. The decision of introducing new members into the company is influenced by the law. Public companies can sell their sales to anyone while it has certain limitations in private companies. So raising fund is a problem for them because there are limited members in the first place. The amount that can be invested by these members will also be limited. When there are many members, even a small amount from each of them will contribute to make a good amount.
It is a difficult job maintaining the accounts of a limited company. The accounts are regulated by complex rules. Yearly accounts are to be submitted by the company with proper balance sheets. It will be both costly and time consuming for larger companies. It does not work like once you set up the company and you are free.
Accounts need to be filed every year at Companies House. In addition, you have to file company tax with HM revenue and customs too. So, it is better you have an accountant to take care of this. Finding a person for this with good expertise will be again a challenging task.
A lot of paperwork is involved in the formation and working of a limited company. As already mentioned, there are numerous strict laws related to the company. Any discrepancy in the proceedings can put the company in danger. So, every single detail of the company must be properly documented for future reference. Even if the limited company is started online, you still have to submit a lot of documents.
When you start the company, you need to provide information like company name, director details, office address and many other details. Moreover, you have to provide two documents namely, articles of association and memorandum of association.
A lot of capital is involved in the set up and maintenance of a limited company. The registration process itself is a time consuming one requiring a huge sum. The paperwork is a lengthy and costly business. Every year a large amount is spent on the company accounts. As the accounts are a bit complex, it is very important to hire a professional accountant who can handle it better.
It is obvious that the employee hired for this will not come with a small salary. It will be difficult for small companies to bear these costs especially if their turn over does not come up to the costs they have to incur.
It is observed that though the private limited companies can have any number of shareholders, they can raise only limited capital. This is because these companies can sell the shares only privately. On the contrary, public limited companies can sell the shares to public and thus raise more funds. The profits made by both these companies are divided among shareholders. But, a part of it is retained which acts as working capital. This is a good practice as the business will not run out of money. When you compare a public and private company, the former has more advantages like bonus, gratuity and a system of leaves you can avail.
All these facilities are unavailable in private companies where they might even have their own rules in addition to the government rules. If a more general question regarding whether a sole trader or a limited company is better, many things have to be considered like tax and financial responsibilities to name a few. The answer depends on the situation because every legal structure satisfies certain criteria. The decision of choosing depends on your personal goals and the structure you wish to head.