What are the benefits of creating a limited company?

A look at the pros and cons of forming a limited company, and some of the factors that you should think about when you make your decision

The chief advantage of a limited company is that the liability of the people who own or control it is limited, due to the fact that, legally, the limited company is a separate entity. This means that the owners are not personally liable for the debts of the company, and their liability is limited to the amount that they invested in the company. (An exception to this is where they have acted as a guarantor for the company.)

The advantages of forming a limited company are:

  • It is relatively easy to raise money to use as capital
  • It is relatively easy to sell a part or even the whole of the business
  • It is possible for employees to own part of the business and participate in the profits
  • It is viewed as more credible than the other business structures by suppliers and customers
  • There are potential tax advantages for high earners (by keeping the money in the business or as a pension scheme)

There are, however, disadvantages of forming a limited company:

  • There are set-up costs
  • More administration is required than other business models
  • The accounts must be filed with Companies House annually, and will be made available to the public
  • There is a possibility of having to produce audited accounts, which will come at a cost
  • The company must pay the employer's national insurance (NI) contribution, as well as employee's, resulting in a higher NI cost than other business structures

These are some of the key factors that should be taken into account when you are deciding whether a shareholders' agreement is the correct document for you and your business.

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