Pros And Cons of Starting a Limited Company

If you are thinking of starting a business then you will have considered forming a limited company. There are a number of benefits, but my experience is that the majority of business owners are not aware of the issues that need to be considered. Here are the main benefits:

1. Using a company makes it easier to bring other investors into the business by selling them shares. There can be various classes of shares conferring different benefits such as voting rights or rights to dividends, depending on how you want to structure the business.

2. It also provides you with a possible clearer exit from the business by being able to sell your shares in the company, and that is a tax-efficient means of exit too.

3. A company will also provide you with the benefits of limited liability, protecting your personal assets from any possible business failure.

4. There are financial benefits to you too as taking a basic salary up to the National Insurance threshold and then any remaining drawings as dividends. As long as there is enough profit in the company the this can be a very effective strategy with tax and NI savings of several thousand pounds possible if your profits are high enough,

5. You can organise your remuneration to suit your tax planning more easily too by leaving money in the company until you need it and only withdrawing funds when you are able to do so at a lower tax rate.

6. You may also be able to involve your spouse or other family members as shareholders and use their lower tax rate for income.

So the case for incorporation is obvious. But there are pitfalls for the unwary or unprepared. Running a limited company brings with it legal responsibilities and you need to be sure that you understand these and are happy to take them on. If you treat the company finances as your personal bank account you are almost certainly going to find yourself in difficulties which may turn out to be expensive. And if you miss out on deadlines set by Companies House or HMRC, there will be potentially serious consequences. So you need to carefully weigh up the pros and cons carefully before starting.

You also need to have a reasonable level of profit in order to realise the tax gains and you should be aware that tax rules change regularly. So it is always wise to form a company because there is a clear business case for doing so, rather than for what may prove to be a short-term tax gain. Make sure you do your research and obtain good professional advice to understand the implications for your situation.

If you have good advice and set up proper systems, you ought to be able to fulfil your legal obligations routinely and concentrate on making money from your business. Many people run successful companies with valued advisors working alongside them and without any difficulties. Others struggle, often because they do not listen to advice nor are careful in their record keeping. So you must do your research, choose your advisor carefully and make sure you act in a businesslike manner. If you do these things there is no reason why you should not succeed. Good luck!