|
Incorporation
The decision whether and when a business should incorporate as a limited company is complex and should not be taken lightly. This leaflet gives guidance on some of the factors to be taken into account. Come and see us if you need more help.
Limited liability
Many people decide to incorporate their business for the simple reason that they want to obtain the protection of limited liability. In a sole trade or partnership the owners are responsible for all the business debts. Their assets, whether business or personal, are vulnerable to unsatisfied creditors. Incorporation protects the shareholders from any liability for the company debts. The most a shareholder can lose is the amount subscribed for the shares.
This is not always the case for company directors who may be liable for certain debts if they have given personal guarantees or if they "wrongfully trade" when the company is insolvent. Since the shareholders and directors are often the same people, limited liability may not be foolproof.
Statutory obligations
It takes rather longer to set up a limited company from scratch than it does to begin trading as a sole trader. The costs are not prohibitive but are higher than an unincorporated business. The protection of limited liability comes with certain obligations and costs. Statutory accounts must be prepared in a prescribed form and lodged annually with Companies House. An annual return must also be completed. There are severe penalties for failing to meet the appropriate deadlines. Directors have responsibilities which should not be taken lightly.
If the turnover of the business is large enough it will also be necessary to have the accounts audited and this may add significantly to the costs.
Statutory accounts may be more difficult for the lay user to understand.
Business name
There is very little protection for the sole trader or partnership business name unless it can be registered as some kind of trademark. The name of a limited company is registered at Companies House and this should prevent anyone else using the same name, or indeed anything too similar if they are in the same line of business.
Raising finance
Borrowing money is often easier for the limited company. Apart from the unquantifiable appearance of substance created by the incorporated status it is easier for a limited company to give security to a lender than it is for an individual. Banks will often ask for a floating charge over the assets of a limited company which provides it with security over most of the company's assets should problems arise. This can be supported by personal guarantees from the directors thus giving the bank even greater comfort than they could get from an individual.
Management
In an unincorporated business it is often difficult to separate ownership and management and problems can then arise trying to keep good staff without sacrificing a stake in the business. Directors of limited companies do not need to have any stake in the shares of the business but have the authority to run the business without owner involvement. It is also easier to split the ownership of the company through its shares than it is to split an unincorporated business through a partnership.
Cessation
Ceasing trade in a limited company can be complicated and may be costly. In a sole trade or partnership it is usually simple and cheap.
|
|
