Why Should I become a limited company?
Setting out to start a business can be a risky, but brave decision. A common way to start a business is to incorporate a limited company, which can make sense especially if youre starting it with a few different people, or receive funding, or use it for its benefits such as limited liability.
But it can make sense to adopt the structure of a limited company even when you think that may not be the case.
You could be a one person team operating a small plumbing business, or a 100 person team operating a large recruiting business, but more often than not they share similar goals. These can include making a profit, expansion but ultimately to run the business separate from you. As much as people can enjoy working for themselves even as a sole trader, you wouldnt want to be receiving phone calls while youre sat on a beach in Spain.
But reaching this goal of keeping it separate can be almost impossible if youre a one person team, or just a sole trader in general. As a sole trader, there is no legal separation from you and the business so its likely that youre not going to put the complete trust in someone else to use your name as you would.
The advantages of maintaining the control can be attractive for some people, especially as they can run the business exactly as they see fit which can be great for the early days. But as the business grows, theres going to be more important decisions to make than the little details.
Who Owns a Limited Company?
With a limited company, the management is separate from the ownership. Directors are charged with the management side of things, while shareholders maintain the ownership. In early days, this is likely to be the same people but the reality of it is, it doesnt have to be. Of course, shareholders come with advantages too, such as they can be used as a way to raise much needed capital (from the sale of shares).
Shareholders arent available with a sole trader or with a partnership. You could offer them a share of the profits, or to become a partner; however, there may not be any profits to have a share of, and a partner does come with more responsibility. Whereas shares can increase even if there are little or no profits (take Snap Inc. for example) so they can remain very attractive to investors.
Setting up for Growth
Growth can be an important factor for many businesses - after all, growth can mean success and success can mean more profits.
Limited companies can often grow quicker, largely down to the offering of shares in the company. They can be used to secure key members of staff with experience or knowledge, whereas this isnt possible with sole traders or limited companies.
A limited company set up may not be everyones cup of tea, but it should certainly be an option to be considered. Of course, you can also have sole traders, partnerships and limited liability partnerships, which we take a look at in our previous blog post.
If youre really unsure on which way to turn - dont panic. Consider asking those who have been in the same situation, or a business advisor or accountant. There are other things to consider too such as tax rules.
To conclude - you should consider all options, but do your research too.
- 30 Sep 2020 - What is a Director's Loan and do you need to pay tax on it?
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- 21 Sep 2020 - What are Preference Shares and Should I Use Them?
- 11 Sep 2020 - Is a Director an Employee of a Company?
- 28 Aug 2020 - How Can I Change The Share Capital?