Becoming a limited company is something a lot of people consider but don’t go ahead with. However, there are numerous benefits of doing so and we take a closer look at the benefits of incorporation below.
Understanding Limited Liability Companies
As you might guess from its name, a limited liability company uses a structure that limits the liability of the owner or owners. The way that the business is structured, the assets of the owner(s) are kept completely separate from the assets or finances of the company.
As a result, any debts that the company accrues are the sole responsibility of the company itself and the owners cannot be held liable for paying back any amounts that are due over and above their initial investment in the business. Because of this, many business owners opt to go this route. It provides protection for their personal finances, while still allowing them to invest in and grow their business.
From a legal standpoint, after a limited company formation limited liability companies are seen as their own entities. That means that legal action can be brought directly against them rather than against the owner. Likewise, these companies may even act as a director for a separate company.
One of the benefits of incorporating is the ability to add the word “Limited” to the end of a business name. This instantly creates the feeling that a business is large and well-established, even if they are just getting off the ground.
Protection for the Company Name
Once the name of the business is registered with the Companies House register, no other company can use the same or similar names.
Easier To Find Investors
Most investors would rather invest their money into a corporation rather than with a sole proprietor or partnership. This is largely because their investment enjoys more protection due to the limited liability of the company.
Easier to Obtain Financing
Banks are generally more likely to provide loans to companies rather than to individuals. Once more, this is largely due to the fact that they are able to secure the loan with the assets of the company. That means that if the company defaults on the loan, the bank can force the sale of its assets to pay back the debt.
Easier Management of Shares
Shares are far easier to transfer in a limited company than in a partnership. The only hindrance would be if there was restrictive language in the articles of the company or its agreement with its shareholders.
More Tax Breaks
Companies that are incorporated may qualified for additional tax breaks that unincorporated businesses are not eligible for. For instance, they may be able to deduct training fees or contributions to pensions.
Lower Effective Tax Rate
Owners and shareholders of businesses can take their profits as a combination of a small salary and dividends. Dividends carry a lower tax rate than self-employment income, which makes them an attractive option for investors.
Taxes Are Only Levied On Money That Is Withdrawn
Sole proprietors or partners are taxed on their earnings as a whole without taking into account how much money they withdrew from the business. Incorporated businesses, on the other hand, are still taxed, but at a lower rate than individuals. Not only that, but their profits are not subject to National Insurance. If the ultimate goal is to keep profits within the business itself, then incorporation makes sense from a tax standpoint.