The top 5 limited company benefits are: (1) Limited Liability Protection; (2) Ownership structure; (3) Separate legal status; (4) Business credibility; (5) Branding & intellectual property.
A limited company has many benefits associated with running a business. A limited company is a separate legal entity that can have its own name, bank accounts, VAT registration number, and most importantly its liabilities are limited by the share capital. Limited companies are very popular in the UK. 600,000-700,000 new limited companies are formed every year in the United Kingdom.
Limited companies are not just for complex businesses, or fancy startups backed by venture capitalist firms. Many sole traders, contractors and small & medium sized businesses may benefit from being a limited company. Limited companies often get special business deals from service providers.
For example, if you are a business that uses energy, many utility companies have special business rates that may only be open to limited companies. You can still get access to business rates as a sole trader, but not to as many deals. If you are interested in business energy, please check out EnergyBillKill.com.
Here are the Top 5 limited company benefits.
1. Limited Liability Protection
Limited companies have a limited liability protection. If, in the unfortunate event, something happens to your company and it runs into trouble, your personal assets are not in danger (unless you have explicitly pledged your personal assets to secure loans for your company). A limited company is called ‘limited’ because it is limited by its shares. A limited company is treated as a separate legal entity and is recognized as a legal ‘person’ vs a ‘natural person’.
In practice, that means that limited companies have a completely separate identities from their owners. There are laws in place (such as Companies Act) that ensure that this special status is not abused. Lawyers will often call this special status as a ‘corporate veil’. It is a fancy term that simply means that your company is the liable and responsible party in its business and not the owners or directors. Again, please note that owners and directors have duties and responsibilities to run companies well and to ensure full legal, tax and regulatory compliance.
As a shareholder in a limited company, your liability is the nominal value of the shares that you own in the company. For example, if the nominal value is 1 penny – that is the maximum that you may be required to contribute to settle the company’s debts if it goes bankrupt. As long as owners and directors have not pledged their personal assets to secure the credit, your personal assets would be protected in most cases. These benefits all go away if you have committed fraud as a shareholder or director. Typically nominal share values are set at £0.01 – £1.00.
Sole traders do not benefit from the above limited liability protections. As a sole trader, an individual, and their assets, are not separate from a business. In practice that means that sole traders are fully liable for all the debts of their business. Regardless of whether a business is run as a sole trader or a limited company, it is always good to have good insurance policies to protect owners, & directors. Directors of limited companies are still responsible for the company.
2. Limited companies can have more than one owner or shareholder
As a sole trader you are your business.
If you have aspirations to grow your company with partners and to get financing, a limited company is an excellent way to start. Companies can have many owners. A company may raise more money by selling its shares in the business to new investors. Many banks would often prefer to deal with limited companies rather than sole traders. Your business can have its own credit rating which, if maintained, will increase your business’ borrowing ability.As the limited company grows its revenues and clients, it will often be able to secure financing without personal guarantees from the company’s owners or directors.
The shareholder structure also makes life easier when you want to bring on new partners or involve family members in your business. Allocating, selling, or creating new shares is a very efficient way to do this.
3. Limited companies have a separate legal status
As mentioned earlier, limited companies are treated as separate legal ‘persons’.
Limited companies have a completely separate identity from the company’s owners and directors. Companies can enter into contracts in their own name. Companies can take on debts and liabilities in their own name. If a company becomes insolvent, it is the company that is declared bankrupt, not its shareholder or directors. However, if you are or have been a director of an insolvent company, that may reflect negatively on your personal credit scores and other professional activity. So while this benefit is real and practical, insolvency does have a downside for directors.
4. Limited companies have a positive impact on business credibility and trust
This positive benefit is more psychological and behavioral, but still very important.
A limited company has a greater status than a sole trader when conducting business. Many incorporated businesses across sectors will often only deal with incorporated companies. As the company’s information is publicly available, it is much easier for business partners to check on the company before starting a business relationship.
A registered limited company is also able to service more complex clients (for example in the information technology or construction sectors). Limited liability protection may be a prerequisite to supply services. As discussed earlier, a limited company may build up its own credit history. The better the credit history, the broader are the opportunities for the limited company. In the digital age, many business partners will run credit checks on the business.
5. Limited company’s unique company name is valuable
If you want to build a great brand, a unique company name that grows with the brand is valuable.
A limited company that carries the business name will become even more valuable as time goes on. In addition to registering a company with a unique name, one may also check trademark registrations. It is very important for a business to protect its intellectual property. Intellectual property is anything to do with your business (not just the design manuals for your fantastic invention, but logos, color schemes, slogans etc…).
In summary, limited companies are fantastic business entities that allow small and large businesses to prosper and grow. Whether you are a sole trader looking to run a small business or techy entrepreneur wanting to conquer the world, forming a UK limited company is a great start. If you are ready to do so please check out our MachFast.com apps and you can get done in minutes.