A limited company is basically a company where the liability of the members of the company is limited to what they have invested. Some limited companies are limited by shares while others are limited by guarantee.
Advantages of Limited Company
There are many advantages of limited companies. Some of them are described in brief below.
1. Company has limited liability
The financial security that comes with a limited company is a huge advantage. The company’s shareholders are only liable for any debt the business has accrued based on their own level of investment and no more. Investors tend to feel more secure investing in a limited liability company.
2. Tax Advantages
Limited liability companies are only taxed on the profits that are made and are not subject to high tax rates that sole proprietorships or partnerships have to deal with.
3. Separate Entity From Owners
A limited company is always considered to be a separate legal entity from the owners. The company is able to exist beyond the life of the owners or shareholders. The company can continue to operate if shareholders retire or die.
4. No Company Car
Large corporations are easily identified by their company cars. The owner of a limited company is better off not buying a company car for business purposes. Using a personal car will allow you to record mileage and be allowed to charge this to the company and benefit from the tax free fuel and costs that are tax deductible to the company.
5. Use of Your House
Instead of paying for a lease, small companies just starting out can be run from your home. The cost of doing so can be claimed on the company’s taxes. This can include the heat, electricity, water, etc for the use of that room or rooms.
6. Control and Ownership of the Company
The directors of a limited company that is held privately are generally the main shareholders of that company. The ownership and control of the business stay in their hands. This allows for decisions to be made quickly and with little ceremony.
7. Name of the Company
The company name is registered with the limited company is registered. This name allows for the company to be identified in the marketplace. It separates it from other companies.
8. Employees as Shareholders
There are several limited companies where employees can purchase shares and become voting shareholders within the company. This allows the employees to have a say in how the company is run.
Disadvantages of a Limited Company
The lists of advantages makes a limited company sound ideal, however, there are several disadvantages of limited company that have to be considered before starting such a company.
1. Accounts are Complex
A limited company has many more complex and restrictive rules that govern their accounts and bookkeeping. The company has to use a double entry format when working with balance sheets and other notes pertaining to the accounts.
The set-up costs of a limited company can be extensive. An experienced accountant or bookkeeper must be hired. The paperwork and registration fees are also other costs as well as typical set-up fees of a business.
3. Capital Raising is Restricted
There is a restriction on the raising of capital through the sale of shares. Private limited companies can use the sale of shares to gain funding, but this is lost when the company has shares that are restricted.
4. Power is Thinned
There are times when disputes arise among the shareholders and the directors and when more and more people hold shares and have a say in the management of the company, power is spread out and diluted. Takeovers can occur this way as well.
When determining if a limited company is the best option for your new business venture it is best to carefully go through the advantages and disadvantages of a limited company. Obviously if the disadvantages are things that you cannot handle, then it is not for you. If the advantages surpass all objections, then a limited company is the best choice.