The Pros and Cons of being a Limited Company

25th October 2011
The Pros and Cons of being a Limited Company image

The Pros and Cons of being a Limited Company

All businesses need to decide the best medium for that business, such as being a partnership/sole trader or say a limited company.

Particularly when I advise small to medium sized businesses I am surprised by the number of these businesses that are not incorporated (i.e. not a limited company) and have not properly considered whether to become incorporated.  So what are the pros and cons of being a limited company?

The Pros

  1. The main advantage is the limited liability status of the company.  If the company gets into financial trouble, save for certain exceptions, the owners’ liability is limited to the extent of their shareholding (e.g. a £1 share) and their personal assets are safe from a claim from the company’s creditors.  The advantage is often diminished where banks or other sources of credit insist on the owners giving personal guarantees.
  1. Quite often the word “limited” after a business name may provide enhanced status in the eyes of bankers, suppliers, potential customers and can often help to gain new contracts.
  1. There can be significant tax advantages.  A limited company pays tax on its profits, and its directors are taxed on what they receive in remuneration from the company.  A partnership on the other hand is not taxed in its own right as a company is (as it is not a separate legal entity).  Instead each partner is taxed on his or her share of the profits, irrespective of how much they have taken out of the business.

Let’s say for example the business makes a profit of £200,000 and pays “salaries” of say £100,000 in total to its two owners.  In the case of a limited company, it would be taxed at 21% on the sum of £100,000 (profit less salaries), and the directors would be taxed at 40% on the salaries of £50,000 each.  The total tax payable would be £61,000 (£21,000 plus £40,000).  In the case of a partnership, the partners would be taxed at 40% on all of the sum of £200,000, even though only £100,000 is paid out in salaries/drawings.  The total tax liability would therefore be £80,000.

  1. Furthermore there are often tax advantages from being a limited company as owners can pay themselves a nominal salary plus substantial dividends at lower rates of tax.  For example you might only have to pay 10% tax on dividends.

The Cons

  1. I think the main disadvantage is the extra administration burdens that can arise.  As a limited company you have to file accounts and information at Companies House, and often these involve a significant cost in terms of accountants’ fees etc.  However usually the tax advantages outweigh these disadvantages.
  1. There can be tax disadvantages in being a limited company and some of these include a less favourable treatment of trading losses that may arise, reduced IHT relief for assets owned personally but used by the company, e.g. premises. Particular care also needs to be taken when there is a prospect that the business could be sold within 2 or 3 years.

If you need advice on whether your business should be a limited company or not then please contact Daven Naghen on 01775 722261 or email daven.naghen@maplessolicitors.com or Gemma Mayer on 01775 722261 or email gemma.mayer@maplessolicitors.com


Maples supporting Macmillan Coffee Morning image

Maples supporting Macmillan Coffee Morning

On 29th September 2017 Maples Solicitors LLP will be hosting a coffee morning as part of Macmillan’s “World’s Biggest Coffee Morning”.

Tea, coffee and cakes will be served from 10:00am until 1:00pm and all donations received will go to Macmillan Cancer Support to assist them with providing medical, emotional, practical and financial support to those facing cancer and their families.

At the same time, Maples will also be running a free Wills, Lasting Powers of Attorney and Probate clinic so that whilst you are in the office you may take the opportunity to discuss any of these with one of the Private Client Team with no obligation to commit. You can use the time to raise any questions you may have about making a Will, who you could appoint as Executors, whether you need a Power of Attorney or how a Power of Attorney works, for example.

Maples hope to see their existing clients join them for the coffee morning and very much look forward to meeting new people- everyone is welcome!

If you would like to discuss any matters in relation to Wills, Lasting Powers of Attorney or any Probate related matters prior to the coffee morning then please contact one of the lawyers in our private client team:-

Jane Mawer- jane.mawer@maplessolicitors.com
Jamie Dobbs- jamie.dobbs@maplessolicitors.com
Faye Blair- faye.blair@maplessolcitors.com

Or telephone the office on 01775 722261 and ask to speak with one of the team.

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Gemma Mayer LLB

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Daven Naghen LLB

"I felt the service I got from Maples was excellent and was very honest all through the process. I would recommend Maples as a first class Solicitors group"

Faye Blair LLB

Faye was excellent, sensitive and acted very well to the time constraints we faced. Great service and dealt with compassion at such sad times made the process less painful very professional.

Jamie Dobbs ACILEx

Over the last forty years I have cause to deal with many law firms both in a personal and professional capacity, including some ‘top’ London Companies. In all of those dealings I have never found anyone as proactive and so willing to offer help and advice as Jamie Dobbs. During the last two years Jamie guided my parents through the completion of Lasting Powers of Attorney. Helped myself with the use of the LPA and recently dealing with Probate and Estate Administration following their death.

Mike Pepper MA

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Claire Smith FCILEx

Claire Smith has been amazing in every way. I highly recommend her and I am so grateful for all her help. She’s professional on all levels, reliable, extremely organised and I will be recommending her to everyone. I’m very lucky to have had her representing me and I can’t thank her enough. She is an asset to Maples. Thanks so much Claire!

Anita Zaborniak

We found it a pleasure to deal with Anita Zaborniak, she was most helpful and informative and kept us up to date with the progress of the purchase of our new home. If we were to move again we wouldn’t hesitate to use Maples again.