3 Pitfalls Of Running A Company
If you’re considering starting a company, you’ve probably been weighing up the advantages and disadvantages before making your final decision. But have you considered that some of the advantages can have pitfalls within them that are not obvious at first glance?
This post aims to highlight some of these pitfalls so you can avoid them when running your company.
1. Believing limited liability always protects you
Limited liability is a great protection that comes with company ownership. Essentially, the company is treated as a separate legal entity, which means that any financial difficulties are the sole responsibility of the company itself and not the owners.
But does this always protect you?
Typically, the owners, and shareholders, of the company are liable for company debt up to the amount that they put in when purchasing their shares. This nominal value is typically set to £1 per share.
But there are instances where limited liability can be lifted, meaning that the company owners and shareholders are held personally liable for the full debt. Typically these instances are limited to fraudulent trading or wrongful trading, so as long as you’re running the company in the correct way, you’re protected. However, it’s still something to keep in mind.
2. Thinking the lower taxes means more profits and take-home cash
It’s true that running your business as a limited company is a tax-efficient way of conducting business compared to a sole trader. For example, companies pay 19-25% corporation tax on their profits, whereas sole traders pay 20-45% income tax on their profits.
So where is the pitfall here? It all comes down to increased administration, record keeping, the need for an accountant, and strict rules for taking money out of the company.
Because of the rules and regulations imposed by Companies House and HMRC, an increased amount of reporting needs to be done with your accounts. These requirements can be complex and time-consuming, meaning many company owners choose to hire an accountant or bookkeeper to help them.
Once you have your accounts in order, you need to consider how long you need to keep your records. Typically you need to keep all accounting records, financial statements and tax returns for six years after the end of the financial year. This record-keeping can take time when done correctly.
You also need to consider that as part of the limited liability structure, the company is its own legal entity, meaning any profits generated aren’t yours to keep as the company owner; they belong solely to the company. If you want to take any of it home, you have to take it as dividends.
3. Believing that having a high profile is always a good thing
When you start to do business with clients and suppliers, they can see you being a limited company as a good thing. Your accounts are posted on the Companies House website along with your details as a company owner. Both of these can make you seem like a legitimate business, which can only be a good thing.
But have you ever considered that your competitors can also see this information?
If your competitors can see information relating to significant business changes, like changes in ownership and upturns/downturns in turnover, it can give them an advantage over you. While there’s nothing you can do to avoid this pitfall, it can help if you understand that it’s there in the first place.
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