The natural progression for many businesses is from a sole trader to partnership to limited company. While it may be everyone’s ambition to put “Company Director” in their passport, it is not necessarily a Good Thing.
Limited companies are usually formed for two reasons:
- To avoid the loss of personal assets in the event of failure, to limit personal liability
- Tax advantages
For many small companies with limited share capital – often just £2 or £100 issued – then banks invariably require director’s personal guarantees, often supported by a charge on the director’s house or other cashable security. (An unsupported guarantee is a pure act of faith).
Some large businesses will trade with a limited company but not from a sole trader on the basis that it implies stability. (The company’s shares and assets can be sold on regardless of the demise of a director).
It is slightly more costly to operate a limited company – more annual returns and incorporation fees, but it is not significant. (Companies with turnovers below £10.2 million and assets below £5.1 million no longer need to have their accounts audited by a chartered accountant for example).
You can form a company within a day or so by buying an “off-the-shelf” company. The current cost of purchasing a new company from the company agents I use, is £120.
By trading through a company, one takes reward by salary, dividends and possibly rent. One great advantage of a limited company over sole traders and partners is the fact that one does not need to make tax payments on account. Corporation tax is due nine months after the year-end, and once paid, that is an end to it (unlike self assessment payments on account).
And there is no obligation to start trading straight away: you can buy a limited company to protect the name. No two companies can exist with exactly the same name.
If your company fails (becomes insolvent) only the assets of the company will be used to pay off creditors, unless fraudulent practice is proven. If however you trade as a partnership or as a sole trader, then your creditors (the bank, Inland Revenue and suppliers) can claim on all your property to satisfy the debts, and if this is not enough, you could be made bankrupt. Undischarged bankrupts cannot start another business or become a director of a limited company, until the directors get discharged.