Limited company or sole trader for your business. Let discuss the advantages and disadvantages of the two form of business structure.
There are two types of limited company. They are private limited company and public limited company. Private limited company registration with Companies House is relatively easy and straight forward. There are more legal administration requirements to satisfy for registration of a public limited company. The minimum share capital required of a private limited company is £1 and for a Public limited company is £50,000.
Private limited company for business is the most popular choice for many new business. The main benefit of trading using a limited company is that of it is the company itself that shoulders the liability as opposed the person running the business. This is because the company and the owner of the company are considered a separate legal entity. The owner’s liability is limited to the amount he/she invested in the share capital of the company and any guarantees he gave when raising finance for the business.
As with a sole trader or proprietorship, the sole proprietor is exposed to unlimited liability. This means that any business debt can be met from the sole proprietor’s personal assets if his/her business fails.
Trading as limited company also provides continuity of the business. The ownership of the company can be transferred easily whereas for sole proprietorship business normally ceases when the business owner wants to retire or death.
The recent changes to Companies Act 2006 have made it even more attractive for sole proprietors to incorporate their businesses. The requirement to appoint a company secretary for a private limited company is now optional. This means that a single person can setup a limited company by himself. He can be the sole director and also the sole shareholder of the company if he/she wishes. However, the person must not be an undischarged bankrupt or disqualified by a court from holding a directorship.
Many financial institutions, banks and suppliers viewed limited company as being a form of more stable business entity compared to a sole trader. This is partly because the company accounts, shareholders and directors details are available for public inspection independently at Companies House and limited company must follows company law when comes to filing Companies House forms and accounts with the Registrar. There is a standards set by law.
Limited company must deliver confirmation statement and company accounts to Companies House every year and submit corporation tax return with HM Revenue and Customs. Also, maintain statutory books and notify Companies House when there is a changes in the registered office or director and so on.
Failure to fulfill these legal obligations, the director of the company can be prosecuted and are subject to fines of up to £5000 for each offence. There is also a late filing penalty for delay in filing company accounts to Companies House.
For sole proprietorship, the owner is to file self assessment return with HMRC only. No documents required to be filed with Companies House.