Many business owners choose to operate their business as a ‘limited company’. Running a business as a company is a different legal format to running a business as a sole trader.
So what is a limited company?
A limited company is a separate legal entity to the owners and people operating the firm. It is seen as a ‘legal person’ and as such it is able to enter into contracts, buy and sell products and services, own property, rent, lease, employ staff, take legal action in the courts, and also be subject to legal action itself. When people do business with a company they enter into contract with the company, where as with a sole trader they are directly contracting with the person involved.
The main points
- A limited company is officially registered at Companies House. Sole traders do not officially register anywhere but must inform HM Revenue & Customs that they are operating a business.
- The liability of the owners is limited. This is seen to be one of the major advantages as a sole trader has no limit to their liability.
- The company shareholders ‘own’ the business, the company directors manage the company and make decisions for the company.
- In some circumstances it is more tax efficient to operate as a company rather than a sole trader.
- Profits in the company may be held over to the next accounting period.
- Limited companies must file accounts and annual returns at Companies House.
- The owner’s personal finances are kept separate from those of the company.
- Registering the name at Companies House will prevent another business from using an identical company name
- A limited company may be deemed to be more professional as it is a recognised business format.
- There are occasions when some businesses will only work with registered companies, but this will depend on you area of expertise.
- It may be easier to raise finance as a registered company.
- If a shareholder wishes to leave the business, sell their shares, retires or dies the company can continue as transfer of ownership is possible.
Limited liability companies are a popular business vehicle for many entrepreneurs, start-ups, and sole traders looking for a more formal business structure. For assistance incorporating a company please contact us or visit our company formation website.