Deciding on the best legal status for your business isn’t straightforward. You might make different choices based on the type of business, how much money it makes, how you want to draw remuneration, and how the business is financed.
As a limited company you have more flexibility over how and when you take money out of your business. Your accountant can advise you on the financial pros and cons of incorporation compared to alternative business structures.
Some businesses opt to incorporate so as to look more substantial and be included on approved bidder lists for larger organisations.
The biggest advantage of trading as a limited company is that any debts and financial liabilities belong to the company and not to you personally. You also have the option to take some of your remuneration as dividends rather than salary, which can be more tax-efficient.
It’s worth remembering that as a sole trader you can still register for VAT and employ people.
To become a limited company you‘ll need to have a legal agreement in the form of articles of association that specifies how the company will be structured and run.
Alternatives to a Limited Company
A partnership is where two or more people are working together and share the profit between them. If you are working in partnership with somebody else or choose to make your spouse a partner in the business you could consider a limited or limited liability partnership. This will offer similar financial protection. These options limit the financial liabilities of each partner to the amount they have invested, A formal partnership agreement is vital if you go down this route and partners will be called members as opposed to directors.
With limited liability status comes administrative requirements as similar returns will be required to be made as with a limited company whilst a traditional partnership model has more flexibility.
Directors and Shareholders
The roles of directors and shareholders in limited companies sometimes cause confusion. Shareholders are the owners of the company. Directors are responsible for running the business and have the authority to commit the company to contractual obligations. Directors are often shareholders in smaller business but a director does not necessarily have to be shareholder.
It makes sense to have more than one director with financial authority so that the company can continue to function if one director is incapacitated.
Shareholders have the right to attend meetings (such as the AGM) and the power to vote out the directors. Shares are normally issued with a nominal value of £1. Creating multiple shares (even if you’re the only shareholder) will make it easier if you want to offer a share of the business to family members or staff in the future.
Dividends will normally be paid in proportion to the number of shares each person owns unless you specifically write a different arrangement into your articles of association.
You should always have a shareholders’ agreement in place. This will specify what happens if shareholders fall out or want to buy the other’s shares as well as protect minority shareholders