Why are limited companies so popular?

Answer 1

The principal benefit of trading as a limited company has always been the limited liability of the company's officers and shareholders. As a sole trader or other non-limited business, personal assets can be at risk in the event of a failure of the business, but this is not the case for a limited company.

As long as the business is operated legally and within the terms of the Companies Act, the personal assets of directors or shareholders are not at risk in the event of a winding up or receivership.

Operating as a limited company often gives suppliers and customers a sense of confidence in a business. Larger organizations in particular will prefer not to deal with non-limited businesses. Also, many of the costs associated with managing and operating a limited company are not much more than with a non-limited business.

There is no obligation for a limited company to commence trading within any set time period after its incorporation. This means that the formation of a limited company is one simple and low cost method to protect a business name. Whilst this does not in itself give any rights to use of the business name, many clients incorporate companies in anticipation of future development of new businesses or in order to protect the limited company name of an existing non-limited business for the future. No two limited companies can exist with exactly the same name.

Directors pay income tax and the company pays corporation tax on company profits. With the current tax rates, company profits earned and retained in the business are assessed to corporation tax at lower rates than if income tax were payable on equivalent profits earned by an unincorporated business. If a limited company becomes insolvent and is wound up, only the assets of the company are used to try to clear its debts. The officers of the company have no personal liabilities, are not made bankrupt and can freely incorporate another company. Depending on the companies documents of formation and constitution. There is also another form of company known as a Limited Company by Gurantee. This type of company provides in its founding documents, that any liability of the shareholders is normally limited to a nominal value such as a £1. This type of company is usually set up as a 'not for profit' company, were no profit is made, just enough to pay the company's debts. This form of company is used by groups of people who do not wish the burden of or who's enterprise will not be satisififed to be registered as a charity however, this does not prevent such a company from being a charity as well. Normally this can be with a llimited company without shares. The shareholders are liable only to the extent of any unpaid shares held.

By contrast, if you trade as a sole trader, partner or partnership, your income will be taxed as proprietors' income, regardless of how much profit is retained as working capital. Interest on loans to the business is also taxed as income. Furthermore, partners are personally and jointly liable for partnership tax and if a partner dies, the surviving partners are responsible for partnership tax. Creditors can claim all your property to satisfy debts, and if this is insufficient, you may be declared bankrupt. An undercharged bankrupt is forbidden to start another business or to become a director of a limited company. The governing law in the UK for companies is the Companies Act 1985 and the Companies Act 2006, along with other acts and SI's.