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Chris Bell

What are the benefits of establishing a limited company?



Legal status-Shareholders and the company are two different entities with legal status. The roles of directors and shareholders are identified in the entire structure of a private limited company. Company investors (shareholders) provide capital and directors to run the company. More clearly defined roles in partnership arrangement – ​​the role of directors and shareholders are identified and segregated in the entire structure of a private company venture agreed when setting up a limited company.

Debt liability-The shareholder’s liability is limited, and the liability is limited to the paid-in capital invested by the shareholder. The company’s finances are independent. The company will be responsible for all debts and will never affect the personal assets of shareholders. Limited liability – the liability of a shareholder is only limited to their paid-up capital invested.

Assets and property ownership – The company is an independent legal entity and can hold assets and property ownership. Compared with any other commercial entity, a private limited company has certain advantages in obtaining bank loans and it is easier to obtain loans for commercial purposes. Ownership of Property-A company is a separate legal entity that can own vehicles, properties, and other assets. It’s a good formation to leverage more loans for business purposes.

Director’s responsibilities-Designated directors’ fiduciary duties to their company include loyalty, the duty of care, and business judgment. If they abuse their power for their benefit, profit from company assets, or improperly pay dividends, the director may face a maximum penalty of five years in prison, a fine, or both. Duties of directors – Appointed directors owe their company a list of fiduciary duties, which are covered under The Companies Act such as loyalties, the duty of care as well as business judgment.

Financing-Compared with a sole proprietorship or partnership companies, suppliers and financiers provide private limited companies with better terms and trading methods. Since the accounts of private limited companies are trustworthy and more reliable, it is easier to apply for loans (depending on the company’s cash flow and business prospects). The public can obtain the company’s past financial reports from the Companies Commission for background checks. If a company has established a solid financial performance, it can be used as a company guarantor for loan applications. Financing parties – Suppliers and financiers offer better terms and trade lines for private companies as compared to sole proprietors and partnerships.

The public can easily access your past financial reports in Companies. The strong financial performance of a company can be used as a corporate guarantor for your future loan application.

Customer image credibility-Private companies have better credibility when bidding for large-scale project cases, and it is easier to undertake some large-scale projects, sales or transactions, and obtain government contracts than sole proprietorships. Credibility in the image for the customer – Private company usually carries better credibility in tendering large project cases as compared to small business formations.

Higher compliance requirements-most private limited companies require auditors to review and sign their financial statements. During the audit process, small and medium-sized enterprises have more opportunities to provide advice through dedicated personnel to improve their accounting efficiency, compliance, and internal control. Higher compliance – Most private companies need an auditor to sign off their financial accounts. During the audit, SME has more opportunities to be advised by expertise on enhancing their accounting efficiency, compliances as well as internal controls.

Tax planning-SMEs can enjoy the company’s low tax rate by withdrawing dividends, which will effectively alleviate tax problems with HMRC.

Tax mitigation – SMEs can plan their taxes wisely to enjoy a lower tax rate in private companies by withdrawing dividends. Unlike sole proprietors, they would have to pay a 28% tax if they made more than 1 million chargeable income in a year.

Joint ventures with foreigners-foreigners can use foreign companies, private or public limited companies to operate a business. Private limited companies provide foreigners with a clear and simple business structure so that foreigners can establish joint ventures with local entrepreneurs.

Shareholder agreement-Private company structure is divided into investment elements and business operations. Active partners can get performance rewards, while investors can get different types of investment returns through preferred stocks and common stocks. For joint ventures with a large amount of capital investment, it is recommended that a comprehensive shareholder agreement be drawn up before the company commences business to protect the interests of shareholders. Shareholder’s’ agreements – Private company structure splits the investment elements and operation of the business. Active partners can have performance-based remunerations, whereas investors can be offered different kinds of return packages in both preference and ordinary shares. Joint ventures with a large sum of capital investment will establish a very comprehensive shareholders agreement before they commence the businesses.

Sustainable business planning-the sole proprietorship or partner company may cease operations when the owner status changes (such as bankruptcy, death, resignation, or new partners) or disputes occur at the partner level. Private limited companies and individuals are separate entities, and will not face the risk of closing the company due to shareholder-related emergencies and waste the resources accumulated by the company in the past. Private limited companies provide a good foundation for resolving disputes. Most shareholders can continue or take over management rights so that the company can develop smoothly in their direction. Continuity – In partnerships, disputes between partners can bring business operations to a halt. The private company offers a good basis in resolving the disputes, and the majority of the shareholders can continue or take over the operation control to move the company smoothly in their preferred direction.

Company costs and management work-Each company has a different annual management fee, which mainly depends on the annual turnover or sales, business transactions, and the company’s total assets. The required expenses include audit fees, income tax agent fees, and company secretarial fees. As more paperwork is involved, operating costs will increase accordingly. Nevertheless, hiring qualified, experienced and trustworthy people to help deal with the account and tax management work can more effectively reduce the risk of non-compliance. Cost and administration work – Cost of auditors, tax agents, and company secretary should be factored into consideration. Despite that, businesses are advised to have qualified and experienced people to help in handling accounts, tax administrations work as well as liaising with company auditors.

It is a very common type of business entity, which is beneficial to operators. The advantage of a “one-person company” is that everything is simplified.