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If you are starting a business, there are a number of structures that you can consider for your new enterprise. The most common structure is a sole trader, followed by a limited company, and then a partnership.
Limited liability
One of the biggest advantages is that its members' liability is limited to the value of their shares or their guarantee, depending on what kind of limited company it is. So anyone entering into a contract with the company has no recourse to the shareholders if they decide to sue. This makes taking risks more palatable for entrepreneurs with new ventures, because the members cannot be called upon for any further contribution than their shares or their guarantee.
However, people doing business with your company will take this into account when deciding whether to enter into a contract with you. So if your company is a start up with no assets, for example, another business might insist on directors' personal guarantees or a further type of security, to reduce their potential exposure should things go wrong.
The limited liability element of companies cannot be abused. So if there are existing debts or obligations that a business has incurred, its assets cannot be transferred to a company simply to circumvent existing liabilities.
Tax efficiency
Incorporating a company can make a business more tax efficient for its owners, who may prefer to share the profits by dividends and directors' remuneration, if they are directors. This can result in a considerably smaller PAYE and NICS bill than the same income would trigger for a sole trader.
Branding
Incorporating a company for a new part of your business allows that branch to take on a separate legal personality, and present its own face to the world from a marketing point of view.
Professionalism
Operating as a limited company implies a certain degree of professionalism, which gives a positive impression to third parties and means that a new business is taken seriously.
Attracting investment
If you want to attract investment and involvement from a third party and do not want to take out debt funding, issuing new shares is easier than getting someone to invest in an unincorporated business. However, by doing this you dilute your ownership and control of the business, and it is a step that needs careful consideration and professional advice.
Public limited companies can offer their shares to the public at large, and often list their shares on stock exchanges so that they can be traded easily.
Succession planning
If yours is a family business, you may find it easier to transfer ownership on your retirement or death to family members if your business is incorporated into a company.
The only disadvantage to having a limited company is that there is an administrative burden that falls on the directors. Updates must be filed at Companies House after certain activities (e.g. changes in share capital and directorships). However, most companies seek professional help with these duties, and the information required in the forms will be easily to hand in a properly run business.
